An Overhyped, Cash-Burning Reverse Merger At 12X Revenue

Seligman Investments | AXOGEN (NASDAQ: AXGN)

AXOGEN (NASDAQ: AXGN)

An Overhyped, Cash-Burning Reverse Merger At 12X Revenue $5.07 Target Price, 82% Downside

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THIS ARTICLE REPRESENTS THE CURRENT OPINIONS OF SELIGMAN INVESTMENTS CONCERNING AXOGEN, INC. (AXGN). Funds and accounts

managed by Seligman Investments currently have short positions in AXGN and therefore stand to realize significant gains in the event that the price of its

stock declines. Although Seligman Investments does not expect to announce in the future any changes to its opinion concerning AXGN, that is subject to

change at any time. Following publication of this article, Seligman Investments intends to continue transacting in AXGN’s stock, and it may cover its short

position and/or be long, short, or neutral at any time hereafter regardless of the views stated herein. This article is for informational purposes only and does

not constitute investment advice or a recommendation to purchase or sell any particular security or to pursue any particular investment or trading strategy.

Seligman Investments cannot guarantee that any projection or opinion expressed in this article will be realized. Seligman Investments’ opinions are based on

the public information, sources, and the interviewed individuals cited in this article, but Seligman Investments cannot and does not provide any

representations or warranties with respect to the accuracy of those materials. In no event shall Seligman Investments or any of its affiliates be liable for any

claims, losses, costs or damages of any kind, including direct, indirect, punitive, exemplary, incidental, special or, consequential damages, arising out of or in

any way connected with any information in this article. We believe the experts we spoke with are reliable sources of information with respect to Axogen.

However, we cannot and do not provide any representations or warranties with respect to the accuracy of the information they have provided to us. The

quotations of experts used in this article do not reflect all information they have shared with us, including, without limitation, certain positive comments and

experiences with respect to Axogen. In addition, the experts have typically received compensation for their conversations with us and may have conflicts of

interest or other biases with respect to Axogen, which may give them an incentive to provide us with inaccurate, incomplete or otherwise prejudiced

information. The former employees of Axogen that we spoke with have been separated from the company for at least 6 months and thus the information they

have provided may be stale. The quotations of experts used in this article are based on Seligman Investments’ notes of conversat ions with such experts and

may not represent a precise transcript of those conversations.

Related parties and affiliates of Seligman Investments manage other funds and accounts aside from those managed by Seligman Investments. These other

funds and accounts may have (i) a long, neutral, or short position in AXGN’s stock or other securities and instruments and/or (ii) different opinions concerning

AXGN than those expressed in this article. In addition, such other accounts may trade in the same securities or instruments of AXGN at the same time, in the

same or opposite direction or in a different sequence as the accounts managed by Seligman Investments.


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Table of contents

1. Introduction to AXGN / executive summary

2. AXGN’s questionable origins and history

3. Negligible and overhyped market size for the company’s core peripheral

nerve injury market

4. Market saturation and growth challenges in AXGN’s core market

5. Negligible commercial opportunity in new indications/products

─ Breast neurotization

─ Oral/maxillofacial surgery

─ Avive soft tissue product

6. Price vulnerability and reimbursement difficulties

─ Unsustainable and aggressive price increases driving growth

─ Widespread customer alienation

─ Threats in the ambulatory surgery center (ASC) channel

7. Elevated risks relating to pay-to-play and anti-kickback laws

8. Looming competitive threats

9. Fragile and overhyped intellectual property position

10. Regulatory risks and red flags in clinical trial delays

11. Red flags in company culture, accounting, and controls

─ Salesforce turnover and instability

─ Alleged internal culture of stock promotion

─ Revenue recognition and alleged backdating of revenue and channel stuffing

─ Questionable reported metrics

12. Valuation, price target, and warning signs in insider selling

3-16

17-28

29-42

43-50

51-63

64-71

72-75

76-86

87-96

97-103

104-109

110-114

Pages


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Introduction to AXGN: stock price and valuation

Axogen, based near Gainesville, Florida, has seen its stock soar from approximately $2 in

2014 to a recent high of $57, closing recently just below $28. The company’s market

capitalization is $1.1B, or 12X revenue.

Key financials

LTM revenues $78MM

EBITDA ($16MM)

EBIT ($17MM)

Net income ($20MM)

Valuation

LTM EV/Revenue 12x

FW EV/Revenue* 8x

EV/EBITDA NM

P/E NM*using 2019 consensus estimate

Capitalization

Share price $27.53

Market cap $1.06B

Net cash $126MM

E/V $938MM

Trading stats

ADV, 3 mo avg $17MM

Short % of float 9.3%

Days to cover 7.0

Borrow rate -1.99%As of 12/17/18

Source: Company filings, Capital IQ, Bloomberg, prime broker figure.


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The company has grown at an exciting clip, albeit on a small base, reaching only modest

revenues despite launching its flagship cadaver-sourced refrigerated nerve strips in 2007.

AXGN is a money-losing enterprise with worsening losses and free cash flows, even after

gross margins have risen from 50% to a remarkable 85% due to aggressive annual price

increases on its core allograft offering. Although “early stage” medtech and biotech

companies typically run losses due to massive R&D, AXGN has lost money in spite of a

historically trivial level of R&D - $400K and $700K in earlier years.

Introduction to AXGN: financial overview

Source: Company filings, Capital IQ

Key financials 2010 2011 2012 2013 2014 2015 2016 2017 LTM Sep 2018

Revenue (mm) 3.0 4.8 7.7 10.9 16.8 27.3 41.1 60.4 77.5

Yoy growth NA 61% 59% 42% 54% 63% 50% 47% 41%

R&D expense 0.4 0.7 1.4 2.1 3.0 3.2 4.2 6.7 9.9

EBIT (4.5) (7.0) (7.8) (9.6) (9.8) (9.3) (8.1) (8.0) (16.5)

Net income (5.4) (9.2) (9.4) (14.6) (17.7) (13.4) (14.4) (10.4) (19.7)

Free cash flow (3.9) (7.1) (8.7) (10.6) (11.0) (13.5) (12.1) (10.3) (20.4)

Margins 2010 2011 2012 2013 2014 2015 2016 2017 LTM Sep 2018

Gross margin 54% 50% 74% 78% 80% 82% 84% 85% 85%

EBIT % -149% -144% -101% -88% -58% -34% -20% -13% -21%

Net income % -181% -190% -122% -133% -105% -49% -35% -17% -25%


5Sources: Axogen Twitter post 6/18/15 (https://twitter.com/AxoGen), https://1800publicrelations.com/geraldo-rivera-show-to-feature-axogen-ceo-karen-zaderej/; Axogen Twitter post 5/9/14

(https://twitter.com/axogen/status/464775907102949376); Fox Business News 5/4/15 (https://vimeo.com/127328309), Fox Business Network 4/12/13 (https://vimeo.com/167281172), BNN TV Canada

6/5/13 (https://vimeo.com/127326276).

Introduction to AXGN: promotional activities

The company’s PR activities appear to be successful, with the stock boasting bullish

“outperform” and “overweight” ratings from the sell-side. A caption during one TV

appearance stated that “Axogen estimates regenerative medicine market at US$17B.”

“AXOGEN ESTIMATES REGENERATIVE

MEDICINE MARKET AT US$17B”

“REGENERATIVE MEDICINE MARKET

EXPECTED TO HIT $17 BILLION”

“BIG $$ IN NERVE REPAIR MARKET”


• The company sells three primary products, used primarily for the surgical repair of peripheral nerves.

- Avance nerve allograft Strips of nerve cut from human cadavers, packaged in several lengths and diameters. The company’s

flagship product, introduced in 2007, which we estimate accounts for half of total AXGN LTM revenues of $78MM.

- Axoguard connectors and wraps Processed strips of pig intestine (“porcine submucosa extracellular matrix”). Connectors are

small tubes typically used at both edges of a nerve graft, and wraps are longer tubes that encase a nerve. Axogen is a third-party

distributor for Cook Biotech, which owns the product line. We estimate it comprises the other half of AXGN’s revenue.

- Avive soft tissue membrane Small sheets sourced from human umbilical cords and used for soft tissue covering. Commercially

launched in late 2016 to compete with MiMedx (MDXG). We believe the product has flopped with negligible revenues, as the

company’s filings state that “All of AxoGen’s revenue is currently derived from only three products, the Avance® Nerve Graft,

AxoGuard ® Nerve Protector and AxoGuard® Nerve Connector.”

• The primary use case is trauma to the extremities, where a nerve is severed and has a gap.

- Most gaps are small and surgeons simply sew both ends of the nerve together

- For larger gaps, surgeons use a strip of nerve harvested from another part of the patient’s body (“nerve autograft”), or they

purchase a cadaver strip from Axogen (“nerve allograft”) and graft it to both ends of the severed nerve.

• The simple nature of the “medical technology” behind AXGN’s $1.2B market cap and 12X revenue multiple is visible below.

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Introduction to AXGN: key products (1/2)

Axogen describes itself as “a leading medical technology company dedicated to peripheral

nerve repair” and is valued as one, despite an estimated 50% of its revenues coming from a

product it doesn’t own and for which it is merely a third-party distributor.

Source: AXGN corporate presentation dated 6/30/2018, hardcopy given to us by the company; AXGN SEC filings.

Avance®

Nerve GraftAxoguard®

Nerve ConnectorAxoguard®

Nerve ProtectorAvive®

Soft Tissue Membrane


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The surgical technique required to use Axogen’s products is conceptually simple. Each

product comes in a few different lengths and diameters. Longer/wider SKU’S are more

expensive.

Source: Axogen 2011 10K, p. 8.

Introduction to AXGN: key products (2/2)


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The bull case on Axogen…

• Its market size is $2.2 billion, as indicated in the company’s presentations and filings. On its analyst day on Nov

19, 2018, the CEO made an announcement unlike any we have heard at a public company - a “beat and raise”

on its total addressable market, saying it is now actually $2.7 billion: “So an exciting change is looking at our

total addressable market. We've talked to you about a $2.2 billion opportunity, which we're increasing to a $2.7

billion opportunity….”

• Its core Avance nerve allograft product is a monopoly with no allograft competition.

• Its product has an overwhelming value proposition for hospitals versus traditional autograft procedures,

where surgeons transplant nerve from the patient’s own body to the site of the nerve injury, thereby saving

thousands of dollars in operating room time

• Its product has an overwhelming value proposition for patients, by preventing surgical complications at the

site where their own (i.e., autograft) nerve is harvested

Yet…Axogen launched its nerve allograft 11 years ago. Which leads us to the elephant in the room…

If Axogen’s allograft product is a monopoly with a $2.7B addressable market,

and has been on the market since 2007, why are Axogen’s LTM revenues a mere

$78MM 11 years after launch, and by our estimate only $39mm in its flagship

nerve allograft product?

Of numerous red flags at AXGN, one simple question led us to investigate the company.

Introduction to AXGN: the mystery of the missing revenue


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• Eight former employees in the field

─ Former sales reps

─ Former sales managers and area managers

─ Former independent distributors, who we believe to be functionally identical to employed reps

• Three former employees, in roles other than sales or distribution.

• Ten surgeons, almost all high procedure volume KOL’s (“key opinion leaders”) in AXGN’s market

─ All but one are long-time customers of AXGN, with several we believe to be in the top 5 among AXGN’s recently disclosed

number of 679 “active accounts”

─ Three are in the top 10 list of recipients of payments from AXGN, according to the Sunshine Act’s Open Payments database

• Two lawyers that specialize in pharma/biotech/medtech intellectual property issues and FDA regulations

• Other industry experts, including an insurer, a reimbursement consultant, and a long-time executive in the tissue bank industry

• An intensive review of public filings, transcripts, press releases, and other public sources of information such as medical

journals

All former employees were at least six-months removed from the company, per best practice research and compliance

guidelines. All experts agreed to not provide any information which is inconsistent with any non-disclosure, confidentiality, or other

agreements or understandings. We mask their names to respect their privacy.

In order to answer this question, we conducted intensive due diligence on the company. Our

investigation included research calls with over twenty sources, encompassing a broad

mosaic of experts on the company and its origins, target markets, key products, customers,

competitors, culture, and accounting and business practices.

Introduction to AXGN: our research process

Source: Active accounts were disclosed on the Q3 earnings call held on 11/29/18, per Capital IQ call transcript.


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This research leads us to conclude that AXGN is a stock promote with a dubious profile and

prospects. We believe the stock is worth $5.07/share, an 82% decline from its recent close

near $28.

Overview of key findings (1/7)

• We researched each of the key claims underpinning the bull case and conclude that they lack credibility.

─ That AXGN’s total addressable market is $2.2B, and now $2.7B as of the analyst day on Nov. 19.

─ That the company is in the early innings of penetrating its target market, with growth projected at 35%-40%/year by sell-side

analysts, growing from $78MM LTM to $154MM by 2020 and $258MM by 2022.

─ That the company will expand usage of its products beyond its core market in extremity trauma into large, new indications –

namely breast neurotization and oral/maxillofacial surgery – and scale new products such as Avive umbilical cord tissue.

─ That the company has no meaningful competition, as Avance is the only cadaver-sourced nerve strip sold in the US market.

─ And that the company has a unique intellectual property position, with patent protection through 2023 followed by 12

additional years of exclusivity through “Biosimilar Protection.”

• We began by investigating AXGN’s origins, as well as the high-risk cadaver tissue space in which it operates.

─ We are troubled by the company’s history as an OTC Bulletin Board stock and its origin as a reverse merger with a failing

microcap company called LecTec.

─ Reverse mergers have a dubious track record in the US public markets, as evidenced by the Chinese reverse-merger wave

earlier this decade, and have been highlighted by the SEC as a category where investors should exercise caution.

─ Axogen was co-founded by Jamie Grooms, who was Chairman of the Board of AXGN until May 2018, served as CEO from

2002 to 2010, and continues as a board member.

─ Previously, Grooms was the founding CEO of Regeneration Technologies, now known as RTI Surgical (NASDAQ: RTIX),

which similar to AXGN sells products made from processed cadaver parts.

─ We are alarmed by Regeneration/RTI’s history, as documented in various investigations and books about criminality

and abuses in the cadaver tissue space. These reports detail RTI’s relationship with a “human tissue trafficking ring” as

well as other disturbing practices. We spoke with a former employee of RTI, who alleged that multiple employees resigned

due to discomfort with “cherrypicking” of clinical data, and that one was let go after “refusing to sign off on data that he felt

was fraudulent.”

─ We note that AXGN and RTI are located a short walk from each other in the same Florida office park; that in 2014 AXGN

hired a CFO with links to RTI; and that a LinkedIn search indicates that 18 current employees of AXGN worked at RTI.

─ AXGN has only two plausible public comps in the cadaver tissue space: RTI and MiMedx (OTC:MDXG). RTI is a $4 stock

with a $250MM market cap trading at 1.3x sales, while MDXG is a $1.60 stock with a $178mm market cap, down 90% from its

peak this year after being delisted in Nov 2018, following allegations of fraud by a number of research firms.

─ Given AXGN’s 12x revenue multiple, we believe these stocks are the canary in the coal mine for AXGN investors and

an indication of the troubled, high risk space in which it operates.


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• AXGN’s total addressable market size, the heart of the bull case, is wildly overhyped and negligible – explaining the

mystery of the company’s trivial revenues 11 years after product introduction.

─ Until recently, AXGN promoted a $2.2B TAM, with its core extremity trauma market comprising $1.5B. On its recent investor

day, the CEO “beat-and-raised” this estimate to $2.7B total, with extremity trauma driving most of the raise and now at $1.9B.

─ To support an extremity trauma market size of $1.5-1.9B, the company states there are 719,000 peripheral nerve injuries

annually, and footnotes an “epidemiological” study it says is from 2008. The entire bull case on AXGN appears to rest on

the massive market size imputed from the purported statistic in this paper.

─ We located this paper, and note that it was actually published in 1998, not 2008; that it covered one regional trauma

center; that this trauma center is actually in Canada; that the paper makes no mention of 719K peripheral nerve injuries,

and nor does it provide support for such a claim; and that the paper’s conclusion is the exact opposite: that peripheral

nerve injuries are rare even in trauma cases.

─ We conducted our own market sizing analysis, using the three credible studies in the medical literature on the prevalence of

peripheral nerve injuries. Our analysis of the data indicates that a mere 1.6% of all trauma patients have peripheral nerve

injuries, implying 28K such injuries vs. the company’s claim of 719K – a 96% difference.

─ We conclude that the actual market size for AXGN’s core Avance nerve graft in extremity trauma – its primary market – is

only $52MM – or 3% of the recently “upsized” TAM.

─ We spoke with 11 former sales reps, area managers, and other employees of AXGN, who describe widespread skepticism

within the company of its promoted market size, calling the stated figures “comical,” “flawed,” and “misleading.”

─ We spoke with eleven surgeons, almost all long time customers of AXGN and key opinion leaders (“KOL’s) in the space, who

corroborated feedback from former employees and indicate that AXGN’s core market is miniscule.

• Contrary to the CEO’s claims that the company is at early stages of adoption in its core market, former sales reps as

well as surgeons consistently indicate that AXGN is close to saturated and is at a “tipping point,” with new accounts

and growth increasingly difficult to find.

─ Our sources indicate that 90% of addressable surgeons are familiar with the product and that 70-80% of them use it, in

contrast to the CEO”s recent claims that penetration is “at something in the 15 to 16% range.”

─ Former reps and distributors indicate that new customer acquisition is falling and that AXGN is rapidly running out of

growth options. One stated that his territory reached saturation in the past year and is now mature.

─ Even AXGN’s most enthusiastic and highest volume surgeons provided unequivocal feedback that is sharply at odds with the

CEO’s claims on early penetration, and echoed concerns around market saturation and growth.

─ Our interviews indicate that even among AXGN’s highest volume surgeons – ones that comprise the bulk of procedure

volumes in the market – AXGN is used infrequently, and that their usage of its products, already low as a percentage

of their total procedures, is maxed out.

─ We conclude that surgeons open to AXGN already began using it 5-10 years ago, and that those who don’t are unlikely to do

so.



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• The company’s claims about driving growth via new, expanded use cases lack credibility

─ AXGN promotes a $250mm market opportunity to use cadaver nerves in breast neurotization. Women who undergo breast

reconstruction after mastectomy typically lose sensation. AXGN is now trying to convince reconstructive surgeons to use

cadaver nerves to “neurotize” the breast to restore some measure of nerve function.

─ We analyzed the most accurate data available, from the American Society of Plastic Surgeons, which leads us to an

addressable market size of only $16MM – 6% of the company’s figure.

─ Former sales reps and executives express deep skepticism that breast neurotization is a material opportunity, citing a trivial

market size, lack of interest or outright resistance from surgeons, a dearth of clinical data, and rejection from

hospitals due to pricing and reimbursement problems.

─ The skepticism was shared by AXGN’s own surgeon customers, even its own early adopters in breast neurotization. We note

that these surgeons may be biased in favor the company as they are some of AXGN’s highest volume KOL’s and in some

cases receive payments from the company.

─ Former employees were equally dismissive of the market opportunity for cadaver nerves in oral and maxillofacial surgery. We

note that far from being an exciting, new indication, AXGN has been talking up the “opportunity” in oral/maxillofacial since at

least 2012, stating then that it was already expanding into this market, yet we have seen no evidence of traction.

─ We believe that investors may be unaware of the regulatory risks of “off-label” or “gray area” usage in breast

reconstruction and other add-on markets the company is promoting.

─ Aside from new indications, Axogen promotes the opportunity in its Avive product, which competes with MiMedx and is also

made from human umbilical tissue. Former employees dismiss the product as a commodity with little potential, while some of

AXGN’s largest surgeon accounts express alarm at the clinical data and AXGN’s sales practices in pushing the

product.

• We believe that AXGN’s growth has driven by unsustainable, aggressive price increases, which have led to widespread

customer alienation and the potential for mass defections as competition ramps. We also note the general lack of

reimbursement, another driver of its limited commercial potential. Experts indicate that even BLA approval would not

meaningfully alter AXGN’s reimbursement profile, given how in-patient hospital benefits and bundled payments work.

─ AXGN’s prices are unusually high, with 7cm nerve strips selling for over $6,000. Former reps indicate that prices have

doubled in just a few years, while volumes have lagged, and that pricing for some SKU’s has jumped 40% in a year.

─ Former reps and distributors point to widespread “anger” and “disdain” toward the company, leading to cancelled

accounts and accelerating defections.

─ One of AXGN’s largest surgeon accounts indicated to us that his hospital is pressuring him to try a competitor.

─ Most ominously, ex-employees indicated their belief that the company’s aggressive pricing has created so much alienation

that customers will defect en masse with a “race to the bottom” in pricing as competitors begin to sell on cost.

─ We explore price sensitivity in the ambulatory surgery center (ASC) channel in depth, as former employees describe it as a

critical threat to AXGN’’s business, as well as why AXGN’s reimbursement challenges are unlikely to change.



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• Although AXGN is currently the only company in the US selling cadaver nerve strips, former employees as well as

surgeons indicate a number of looming competitive threats.

─ While AXGN enthusiasts point to the lack of a competing cadaver nerve product to date as validation, we believe it indicates

that the market is simply too small to bother, a view shared by AXGN’s own surgeons. If it was as large as AXGN claims,

we believe it would have been flooded with competitors a decade ago. We believe the company has no way to win: either the

market is negligible, and if it’s not it will be a race to the bottom in pricing – a sobering fact as AXGN’s current 85%

gross margins imply massive room for competitors to slash prices.

─ Despite the lack of an Avance competitor to date, our calls with former employees indicate elevated fear within the

company, especially about Integra (NASDAQ: IART, $4B market cap), while others pointed to Baxter (NYSE: BAX, $34B

market cap).

─ Several former reps and distributors believe that identical cadaver grafts are coming in 2019, with a former sales rep

indicating that a surgeon who used to purchase from AXGN is working on a competitor, and another stating that he’s spoken

with two other entrants that are “actively, aggressively pursuing” cadaver allograft.

─ Three other former employees expressed concern about the competitive threat from 3D nerve printing and synthetic grafts.

─ Surgeons corroborated these competitive threats, especially Baxter, and highlighted others, stating that AXGN’s product was

easy to replicate and that “anyone can do this.” They further indicated that for short gap nerve injuries, which comprise the

vast majority of peripheral nerve injuries, virtually any alternative to nerve allograft works fine, such as conduits or

inexpensive, commodity connectors.

─ We believe investors are unaware of the most significant potential risk to AXGN’s viability: competition from a low-cost

Chinese entrant which states that it has already replicated AXGN’s core product, and which already has the equivalent

of FDA approval in China, while Axogen operates under a high-risk regulatory status with no FDA approval much less a

completed clinical trial or BLA submission.

• Despite launching its cadaver nerve product in 2007, AXGN has yet to even finish enrolling a clinical trial or submit a

BLA. The company operates under a murky, high-risk FDA status in the interim, under which its products can be pulled

from the market at any time at the FDA’s discretion.

─ AXGN initially attempted to launch its Avance graft as a Section 361 HCT/P tissue product, which bypass requirements for a

trial. However, in 2010 the FDA determined that it was a biologic which requires a Phase 3 clinical trial and a Biologics

Licensing Application.

─ The FDA is currently exercising “enforcement discretion” and allowing the company to distribute its products as it transitions to

a trial and BLA, assuming it follows various conditions. AXGN’s filings imply that if “BLA submission is neither timely nor

adequate” the FDA may forbid sale of its products.

─ Given the requirement for “timely” BLA submission, we note that AXGN’s RECON clinical trial keeps getting delayed. The

study requires a mere 150 patients and began enrolling over three years ago, yet has still failed to complete

enrollment. ClinicalTrials.gov indicates that the study’s page hasn’t even been updated in almost 3 years.



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• Murky, high-risk regulatory status and delays in clinical trial enrollment and BLA submission (continued)

─ The latest date provided by the company “anticipate[s]” completing trial enrollment by end of 2018, with other comments

indicating that a BLA would be submitted “in late 2020, early 2021.”

─ In our experience analyzing trials, delays in patient enrollment are one of the earliest and riskiest warning signs for

investors. We discussed with a key KOL surgeon our concern that AXGN may be seeing something in its current registry

data that it doesn’t want expressed in a completed clinical trial, and he specified why this concern is valid.

─ We have never heard of a company launching a product in 2007, and then planning to take 13 or 14 years to submit a BLA,

assuming it even meets its current timeline. We note that if the company submits a BLA by 2021, that would be 11 years after

the FDA determined that it was a biologic requiring a clinical trial and BLA – which strikes us as neither “timely” nor

compliant with the FDA’s transition plan.

─ Further straining credibility, AXGN’s filings state that its Avance graft has patent protection through September 2023,

indicating that its core product is close to the end of its lifecycle. We have never heard of company waiting two years

before its patents expire to finally submit a BLA, with approval potentially coming AFTER it has no patent

protection.

─ Ominously for AXGN, the surgeons we queried for feedback on AXGN’s ongoing trial delays provided reasons that cast

further doubt on the company’s commercial potential: surgeon apathy in participating in the trial, patient resistance, and

a negligible patient population. One expressed skepticism that AXGN”s trial would even enroll this year, implying

yet further delays.

• We note sharply elevated payments from AXGN to physicians, relative to its revenue, as disclosed in the Sunshine

Act’s Open Payments database, creating elevated risks relating to pay-to-play and anti-kickback laws.

─ 2017 data show $1.6MM in payments, or 2.6% of 2016 revenue. Since 2013, the database implies that AXGN has spent

approximately 2 to 4% of its annual revenues on physician payments, a level far in excess of firms we benchmark.

─ We find this troubling, as we have observed other medtech and pharma/biotech companies become the targets of

legal/regulatory action based on allegations of violating anti-kickback laws. We make no such allegation toward AXGN, and

simply note what we consider to be an elevated level of payments.

─ However, former sales reps indicated that surgeons receiving payments from AXGN are critically important to the company’s

revenues, and pointed to several red flags which we feel are important for investors to note.

• AXGN’s perceived intellectual property position is a key element of the bull case. However, our analysis of the

company’s patents and regulatory status leads us to conclude that its IP is among the weakest we have seen.

─ We first note that an estimated 50% of AXGN’s revenues come from being a third-party distributor for the Axoguard line, in

which it holds no IP, and for which the patents have already expired.

─ The level of R&D investment required to originally develop the nerve graft “technology” it licenses appears trivial, which we

believe to be a crucial indicator of the strength and value of a company’s underlying IP.



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• AXGN’s weak intellectual property position (continued)

─ An AXGN filing states that its license agreement with the University of Florida requires a mere $2,000 milestone fee if AXGN

receives FDA approval for its Avance graft. This is the smallest milestone payment we have ever seen, and is yet another

gauge of the value of the underlying science.

─ The company’s R&D expenses have historically been negligible, providing a further measure of the simple nature of its

offering and its minimal replacement value.

─ We examine each of the four key claims that underpin the IP case on AXGN: i) protection afforded by its core Avance

patents, which expire in 2023; ii) supposed exclusivity for another 12 years after these patents expire, until 2035; iii) the “entry

barrier” provided by its FDA transition plan and the presumed need for an entrant to spend “8 years” on trials; and iv) “trade

secrets” for the cleaning and processing of cadaver nerves.

─ In conjunction with a patent analysis, we spoke with two lawyers with extensive experience in FDA matters and expertise in

medtech/pharma IP. This research leads us to conclude that each of the four claims is lacking in credibility, and that the

company has no meaningful IP protection and cannot prevent a copycat from entering the market today and starting

a race to the bottom in pricing.

─ In addition, our patent review uncovered a key risk for AXGN’s clinical trial, relating to the use of a now-discontinued brand of

detergent for washing nerves. We believe the FDA could force AXGN to re-start its BLA efforts from scratch with the

replacement chemical, given the strict requirement for in-process controls and leading to even further BLA delays.

• Our research points to a long list of red flags concerning the company’s culture, accounting, and controls.

─ The vast majority of former employees we spoke with described a culture of fear within the salesforce, resulting in what they

described as instability in the field, rampant turnover, and low morale.

─ In our experience with medtech companies, salesforce instability is a key warning sign before growth rates hit a wall.

─ Former employees describe a culture focused on promoting the stock, with one saying that company has a short term

mentality “to torch this market as fast as possible and get out.”

─ The feedback provided is consistent with anonymous employee posts on CafePharma, a site we’ve found valuable as a check

on what is occurring inside a company. This is the first time we have seen 19 pages of negative posts about one employer.

─ A number of former employees allege channel stuffing, given that the company’s consignment model creates potential for

abuse, as well as alleging questionable revenue recognition practices.

─ The allegations additionally include misleading operating metrics, with one former rep implying that the company’s

definition of “active accounts” may overstate the actual number by a factor of ten.

─ We are also troubled by the company’s longtime use of a relatively small auditor with what we consider to be a

local/regional profile. AXGN switched to a large firm earlier this year, perhaps to establish credibility for its $120MM equity

raise. The previous auditor had audited AXGN since 2011, and LecTec – AXGN’s troubled reverse merger partner – since

2004, according to Capital IQ. A Capital IQ search shows only two current publicly traded clients of this firm, both OTC Pink

Market companies, one with $100K market cap and one with $5MM.



16

• Our valuation analysis leads us to believe that AXGN is worth $5.07/share, an 82% decline from its recent close of

$27.53.

─ We believe that AXGN has only two appropriate public comps, both in the cadaver/umbilical tissue space: RTI Surgical (RTIX)

and MiMedx (MDXG)

─ RTIX trades at an EV/revenue multiple of 1.3x, and has often traded below 1x, with a $4 stock and $250MM market cap on

LTM revenue of $281MM. MDXG trades at an EV/revenue multiple of 0.5x, with a $1.60 stock and $178MM market cap on

LTM revenues of $304MM. We note how remarkably similar RTIX and MDXG are in terms of revenues and market cap, and

the low revenue multiples for each.

─ Yet remarkably, AXGN currently trades at a 12x EV/revenue multiple with a $1.1B market cap. We note that although

AXGN has shown growth, albeit on a small base with growth rates at high risk, several other factors are critical inputs.

─ First, we estimate that half of AXGN’s revenues come from its Axoguard line of connectors and wraps, a commodity,

me-too product that it doesn’t even own and for which it is merely a third-party distributor. We do not believe investors

appreciate this fact, as AXGN trades at a lofty multiple worthy of an innovative biotech with powerful IP vs. a pedestrian

distributor.

─ Second, AXGN is a money-losing company with poor economics: -21% LTM EBIT margin, -25% LTM net income margin,

and massively negative operating and free cash flows.

─ Third, AXGN has binary risk of losing the ability to market its flagship product, as the FDA can rescind its ability to

market the product at any time, and even if the company submits a BLA, its BLA may be rejected.

─ Applying the average multiple of RTIX and MDXG yields a $5.07 target price. Even if we apply RTIX’s multiple of 1.3x

revenue, given MDXG’s recent delisting, and if we assume that the company is successful in forcing additional price increases

and meets it 2019 consensus estimate of $115MM sales, that yields only a $150MM enterprise value. If we add back an

estimated $100MM cash remaining at that time, we arrive at a $250MM market cap – roughly similar to RTIX and

MDXG’s valuations today - or again close to $5/share.



17

Table of contents




nerve injury market




















3-16

17-28

29-42

43-50

51-63

64-71

72-75

76-86

87-96

97-103

104-109

110-114

Pages


18

• LecTec went public in 1986 and sported a market cap of $10mm in the months prior to the reverse merger. The company

appears to have operated as what is often characterized as a “patent troll,”1 given the first risk factor listed in a historical 10K:

“Patent litigation is expensive and requires substantial amounts of management attention.” The last data in Capital IQ shows LTM

revenues of $113k and operating income of ($5MM) as of June 2011, and losses for 15 straight years up to that point.

• LecTec’s filings state that its CEO and CFO was Gregory Freitag, who currently serves as a board member of Axogen as well as

its SVP Business Development and was also Axogen’s CFO from 2011 to 2014 and from 2015 to 2016.

• For the first year after the reverse merger, AXGN traded with a market cap of $20-40mm. Shares generally remained below $2-4

until approximately three years ago.

• With highly negative margins and cash flows since going public, AXGN has survived via an ongoing series of financings typical of

the reverse merger genre. Shareholder dilution via share count inflation is par for the course, with shares outstanding spiking

from 11.1mm in 2011 to 38.7mm most recently.

- Loans historically with rates as high as 18%. A 2011 10Q indicated a rate of 18% per month, which we assume - but are

not certain – must be a typo.

- $21mm via a structured “Revenue Interests Purchase Agreement” with PDL Biopharma in 2012. Two years later PDL

announced they had already received $30mm from AXGN in addition to its revenue interest payments, indicating a

stratospheric cost of capital2.

- We note a general absence of early healthcare investors whose involvement we would view as validating R&D

and innovation, and instead note the prevalence of opportunistic financial investors that traffic in PIPE’s and OTC

companies.

- In May 2018, AXGN completed its largest offering to date, for net proceeds of $132mm at $41/share, by Jefferies, Leerink,

William Blair, and JMP Securities, dwarfing the small equity raises it had done in the past and enabling the company to

acquire a measure of Wall Street “validation.”

1 https://en.wikipedia.org/wiki/Patent_troll2 http://investor.pdl.com/news-releases/news-release-details/pdl-biopharma-completes-royalty-transaction-axogen;

https://www.prnewswire.com/news-releases/pdl-biopharma-announces-successful-conclusion-of-revenue-interest-agreement-with-axogen-282684291.html,Other sources: Capital IQ data for LecTec and Axogen; LecTec 10K filed Mar 30, 2011 and other Lectec SEC filings; AXGN SEC filings.

In 2011, Axogen “went public” through the backdoor mechanism of a reverse merger with a

troubled microcap company called LecTec (OTCBB:LECT), thereby avoiding the scrutiny and

review associated with a standard IPO process.

AXGN’s questionable origins and history: reverse merger


19

• Grooms’ bio indicates that he has been a longtime executive and

entrepreneur in the tissue bank industry. He was the director of

the University of Florida Tissue Bank from 1992-95 and its CEO

from 1995 until its spin off of Regeneration Technologies in 1998.

Regeneration Technologies went public in 2000 and is now known

as RTI Surgical (ticker: RTIX).

• Our review of the tissue bank industry, which sources human

cadavers and sells parts to companies such as Axogen, points to

a pattern of troubling practices and red flags.

• Grooms abruptly departed as CEO of Regeneration Technologies

in December 2001, two months before a sudden 60% drop in the

stock following the further departures of the CFO and VP Sales,

when RTI announced that it was delaying its Q4 and 2001 results

due to accounting issues. Our review of the accounting during

Groom’s tenue as CEO leads us to believe that the

accounting was questionable and marked by discrepancies,

an opinion corroborated by the sharp reversals in the

company’s growth rate and margins after the accounting

issues came to light.

• Grooms continued as Chairman until April 2002 and founded Axogen sometime that year.

Axogen was co-founded by Jamie Grooms, who was the Chairman of the Board of AXGN

until May 2018, served as CEO from 2002 to 2010, and remains a board member. Previously,

Grooms was the founding CEO of Regeneration Technologies, now known as RTI Surgical

(NASDAQ: RTIX), which similar to AXGN sells products made from processed cadaver parts.

AXGN’s questionable origins and history: founder’s background

Source: https://www.axogeninc.com/about-axogen/board-of-directors/3364/jamie-m-grooms

Other sources: Regeneration Technologies S-1 filed June 23, 2000; Regeneration Technologies SEC filings; RTI site http://www.rtix.com/en_us/about/company-history


20

• After an initial flurry of growth to $93mm in revenues, RTI’s revenue fell to $74mm over the following two years. We note the

similarity to AXGN’s current revenue level. Acquisitions in 2008 and 2013 added revenue, but RTI’s revenue has been close to

flat since 2014, the first full year following its last acquisition.

• RTI’s free cash flow has been negative in most years since 2000. As a result, the company has had to raise money via a PIPE and currently has approximately $115mm of debt and preferred stock.

RTIX stock chart, 2000-present

RTI is a $250mm market cap company trading at 1.3x sales vs. $1.1B market cap and 12x

sales for AXGN. RTI’s stock has gone sideways since its IPO in 2000, trading between $2-

$4/share for much of the last ten years. Given their intertwined histories and the fact that

both companies sell processed cadaver parts, RTI is AXGN’s closest comp – and the canary

in the coal mine for AXGN investors.

AXGN’s questionable origins and history: founder’s previous public company

Source: Capital IQ and Bloomberg data


21

Besides RTI, the only other relevant comp for AXGN is MiMedx (NASDAQ: MDXG), a

“regenerative biologics” company selling allograft products from processed human

placentas. The company has a $178MM market cap with a $1.60 stock down 90% from its

peak this year, after allegations of rampant fraud and a recent delisting by Nasdaq. The

company hasn’t filed financials since September 2017 and its auditor resigned on December

5th, 2018. We note numerous reports on MDXG published by Viceroy Research Group,

Aurelius Value, and Citron Research.

AXGN’s questionable origins and history: high risk space

Allegations against MDXG by various research firms

• Undisclosed adverse reactions to tissue allograft

• Numerous federal investigations

• Channel stuffing, using physician owned distributors,

employee owned distributors, and other mechanisms

• “Kickbacks” and “bribery”

• “Reimbursement fraud”

• “Anti-whistleblower retaliation”

• “Undisclosed failed inspections”

• “Undisclosed related party transactions”

Source: https://citronresearch.com/wp-content/uploads/2017/10/Citron-chimes-in-on-MiMedx-Addendum.pdf/; https://viceroyresearch.files.wordpress.com/2018/05/greatest-hits-mdxg-

11-05-2018.pdf; http://www.aureliusvalue.com/company/mdxg/

MDXG 10 year chart


22

“Yet another tissue bank is being investigated by the Wisconsin legislature after workers sent anonymous letters

charging that "Donor families are shamed and manipulated into providing consent," and that the non-profit tissue bank

was run "for the sole profit" of its directors and Regeneration Technologies Inc. (RTI).

[…] Grooms denies families have been pressured by workers at the RTI-run tissue bank in Wisconsin. But according to

papers filed with the federal government, RTI does offer cash bonuses for keeping donor numbers high. Grooms denies

that as well, saying the bonuses were for cutting costs.

"There are no bonus plans or incentive plans to increase donations," he said. Shown his own company's documents

describing cash bonuses calculated on the number of donors per financial period, Grooms said, "it's just not factual."

However, former employees of an RTI-run tissue bank, who spoke with CBS News but would not talk on camera for fear

of retaliation, said the higher the body count, the bigger the bonuses they received.”

Source: CBSnews.com, 1/31/2002, https://www.cbsnews.com/news/grabbing-the-gift-of-life-31-01-2002/

We detail a number of questionable practices that were alleged at Regeneration

Technologies. We begin with a 2002 CBS News story on tissue banks “improperly

pressuring grieving families to hand over body parts” and using questionable cash bonuses.

The article quoted Grooms denying the allegations, even when confronted with evidence to

the contrary.



23Source for all quotes on slide: ICIJ investigation, “Skin and Bone: The Shadowy Trade in Human Body Parts,” 2012. https://www.icij.org/investigations/tissue/.

• The report detailed RTI’s relationship with Michael Mastromarino, who ran a New Jersey-based tissue recovery business called

“Biomedical Tissue Services” and “was the leader of a now-infamous human tissue trafficking ring that fed the

international trade in body parts.” It stated that he was now in prison for a sentence up to 58 years.

• It stated that RTI was a key customer: “The disgraced dental surgeon from Brooklyn supplied the raw material for products

used for a host of surgical operations […] He was a ground-level player in an industry that makes its profits by harvesting human

tissues mostly from the United States, but also from Slovakia, Estonia, Mexico, and other countries around the world. One of

Mastromarino’s top buyers was Florida-headquartered RTI Biologics, a processor of American, Canadian and Ukrainian

body parts ...”

• The article indicated that for over three years, Mastromarino’s firm supplied parts from cadavers to RTI Donor Services, a

“nonprofit subsidiary” of RTI. The article quotes him as testifying that “[RTI] then said, ‘Listen, we can get into your business, we

can get you started, we can open up your own business.’”

• The article listed The Alabama Organ Center as another RTI supplier and stated that it’s second-in-command “pleaded guilty to

accepting kickbacks from a funeral home in exchange for tissue recovery contracts” and quoted comments from his lawyer:

“There are too many loopholes. There are too many temptations. There’s too much money out there. This industry is out of control.”

RTI has also been alleged to have sourced human tissue from a trafficking ring. In 2013, the

International Consortium of Investigative Journalists, the same organization which

published the Panama Papers, wrote a four-part series titled ‘Skin and Bone: The Shadowy

Trade in Human Body Parts,” which they described as an “eight-month project across 11

countries” with “200 interviews” with “industry insiders,” “surgeons,” and “convicted

felons.” We provide a link to the series below.



• The report indicated that Tutogen sourced tissue from a Ukrainian supplier called BioImplant, launched by a Russian coroner,

and quotes an internal Tutogen memo which stated that “The flow of money is difficult to track” and that “We can’t control

the activities of our middlemen.”

• The report states that Tutogen nonetheless continued sourcing from Ukraine, and that families there began alerting police that a

morgue supplying Tutogen was usurping body parts without appropriate consent. It continued: “Some families claimed they

were tricked, pressured or threatened into consenting. Police said in some cases signatures had been forged.”

• The article quoted the founder of a major eastern European tissue bank who said he visited Ukraine at the request of officials

interesting in starting a business similar to Tutogen’s suppliers in Kiev: “There was too much vagueness, too much uncertainty

concerning who’s responsible in terms of control, traceability. I don’t like what I saw, and I just walked away.”

• The piece indicated that RTI’s now-convicted supplier tried to source tissue from the same region as Tutogen: “He flew [to

Kyrgyzstan] to meet with a top prison official […] Mastromarino said [the official] promised to sell him the bodies of executed

inmates […] The FDA was concerned about the risk that tissues harvested from Kyrgyzstan might carry Creutzfeldt-Jakob

disease, a fatal neurological disease akin to Mad Cow disease.”

• The report indicated that the FDA ordered RTI to stop identifying tissue originating in Ukraine as German, and that RTI’s

Ukrainian supplier began exporting large amounts of tissue directly to Florida after RTI merged with Tutogen. The ICIJ indicated

that after its report was published, RTI said it “made a decision to voluntarily suspend import of tissues from Ukrainian

institutions.” ICIJ linked to the statement, which continued that “We may reinstate at some future date”

• In May 2014, Axogen hired a new CFO, now no longer at the company. AXGN issued a press release on 5/12/14 stating that

“…Mr. Johnston served as CFO of Tutogen Medical facilitating its sale to RTI Biologics.”

24Source for all quotes on slide: ICIJ report, https://www.icij.org/investigations/tissue/body-brokers-leave-trail-questions-corruption/; RTI linked statement: https://www.documentcloud.org/documents/423429-rti-sept6.html; AXGN ex-CFO bio: https://www.linkedin.com/in/bob-johnston-ba8a4316/; Axogen press release https://ir.axogeninc.com/press-releases/detail/374/axogen-inc-appoints-lee-robert-johnston-jr-chief

The ICIJ investigation further detailed abuses by a German company called Tutogen, which

was also exposed in-depth by the German magazine Der Spiegel. We note that in 2008,

Regeneration Technologies merged with Tutogen and changed its name to RTI Biologics. We

also note that in May 2014, Axogen announced that it had hired the former CFO of Tutogen

as its CFO.

AXGN’s questionable origins and history: founder’s previous public company / AXGN hire from Tutogen

https://www.icij.org/investigations/tissue/body-brokers-leave-trail-questions-corruption/

https://www.linkedin.com/in/bob-johnston-ba8a4316/


25Source for all quotes on slide: Annie Cheney, Body Brokers, Inside America’s Underground Trade in Human Remains, 2007.

• The book “Body Brokers: Inside America’s Underground Trade in Human

Remains” states that RTI “actively encourages its suppliers to access

bodies through funeral homes. In 2004, the company had relationships

with as many as 300 funeral homes around the country.” (p.193)

• It further indicated that a funeral home may have agreements with tissue

banks where “Each body may produce a tidy kickback,” and that the

funeral director may in fact own a tissue bank outright and earn “thousands

of dollars selling the parts of each corpse entrusted to his care” without

“bother[ing] to ask permission.” (p.22)

• The book quoted the former owner of a crematorium “now serving twenty

years…for embezzlement and mutilation of human remains”: “[He] said

the cadaver trade is rife with people who “slip up.” He said it was the

nature of the game…’We all have a line in the sand…and people in the

anatomical business have an eraser in their right hand and a stick in

their left, and that line is moved daily.” (p.74)

• “…after the scandal broke, [RTI] took a full week to announce a recall of

products made with what might have been stolen tissue.” (p.193)

• ‘The tissue banks that RTI purchased became part of a new company, RTI

Donor Services, which advertises itself as a nonprofit but is little more

than a tissue funnel for the profitable RTI.” (p.179)

At least four books and various long-form journalism investigations into the tissue bank

space, one as recent as late 2017 by Reuters, point to ongoing, widespread issues: conflicts

of interest, criminal penetration, lack of donor consent, lack of “supply chain” transparency

or monitoring, regulatory loopholes and lack of oversight, and a long list of scandals,

prosecutions, and under-reported tissue safety problems.

AXGN’s questionable origins and history: red flags in the cadaver tissue space


26

• A Chicago Tribune article in 2000 titled “Donor Bodies Milled Into Growing Profits” discussed problems at a “nonprofit” tissue

bank called Allograft Resources, and stated that “RTI President Jamie Grooms and another RTI executive sat on Allograft's

board of directors.”

• According to the article, an individual affiliated with the University of Wisconsin hospitals and clinics helped create Allograft

Resources. Previously, he had “arranged to have the tissue that was harvested from hospital patients delivered to the American

Red Cross.” After he helped found Allograft, however, it received the tissues instead, and he collected fees from Allograft. He

resigned after university officials discovered the arrangement.

• The article further quoted the former head of the FDA, David Kessler, on the tissue bank space: "The problem that you find is

that lots of guys just view this as a commodity. My sense was, if certain guys weren't in this business, they'd be in

concrete.“

• In spite of these issues, RTI acquired Allograft Resources. In 2009, a former employee of Allograft Resources wrote a book

exposing myriad abuses that he observed during his time at the organization. We believe the “Processor” whose identity he

masks is RTI.

“During the acquisition of the various procurement agencies, one major problem prevailed for the Processor – public opinion […]

The management agreements that were set up allowed each individual agency to retain their company identity and not-

for-profit status, although the parent company was for-profit […] The Processor felt this would maintain the public appearance of not-for-profit agencies and insulate them from the inevitable criticism of profiteering in the tissue industry.”

Source for all but last quote on slide: https://www.chicagotribune.com/news/ct-xpm-2000-05-21-0006170024-story.html; source for last bullet:

Christopher Truitt, The Dark Side of Tissue Donation, 2011, p. 35.

Another investigative article pointed to Grooms’ affiliation with a “nonprofit” tissue bank

where the nonprofit status strikes us as questionable. We note that the use of “nonprofit”

fronts in the tissue bank space appears to be a common tactic.

AXGN’s questionable origins and history: founder’s previous affiliations


27

“Both RTI and Axogen originated with deals Jamie [Grooms] did with the University of Florida. RTI is across the parking lot from Axogen. I struggled there because of ethics issues. I saw the business team cherry-picking clinical data. They were trying to report only good results. That’s definitely not ok for clinical studies and papers. I had a number of people I was close to in regulatory who resigned and didn’t feel comfortable because of that. I can name five people. [Name redacted] was let go because he refused to sign off on something. His position was [redacted]. He refused to sign off on data he felt was fraudulent. Look up [name redacted] on LinkedIn. He also had a high position. I don’t know the exact circumstances. Another place you want to look is [name redacted] was deposed in a case. Public knowledge. The company was ruled by fear and intimidation. Lot of bullying. Lot of intimidation, threats, from management in general and even colleagues. Not an easy place to work.” – Former employee of RTI


In addition, we spoke with a former employee of RTI, who pointed to red flags in the

selection of clinical data, and stated that an employee was let go because “he refused to

sign off on data he felt was fraudulent.”

Source: Seligman interview/expert consultation


28

• The founder/ex-CEO of Regeneration Technologies, now known as RTI Surgical, founded Axogen and served

as its CEO from 2002 to 2010

─ Served as Chairman of the Board of AXGN until May 2018

─ Continues as a board member of AXGN

• “Jamie Grooms founded Axogen. He groomed Karen [Zaderej] to become the CEO.” – former AXGN

executive

• Axogen and RTI are located within a short walk in the same Florida office park.

• In 2014, Axogen hired a former executive of Tutogen as its CFO. Tutogen had merged with RTI in 2008.

• A LinkedIn search indicates that 18 current employees of AXGN worked at RTI.

We find these and other allegations against RTI to be troubling and view them as a

significant risk factor for AXGN shareholders, given the proximity and intertwined histories

of the two companies.

AXGN’s questionable origins and history: founder’s previous company, overlap between AXGN and RTI

Source: Seligman interview/expert consultation; LinkedIn search; Axogen press release https://ir.axogeninc.com/press-releases/detail/374/axogen-inc-appoints-lee-robert-johnston-jr-chief


29

Table of contents




nerve injury market




















3-16

17-28

29-42

43-50

51-63

64-71

72-75

76-86

87-96

97-103

104-109

110-114

Pages


30Source: Axogen corporate presentation, dated June 30, 2018, https://content.equisolve.net/axogeninc/media/d1d80ffaa79b3ed207f2594d25be4ebc.pdf. Red highlights added by us as emphasis. The

URL currently yields an error page although we have a hard copy of the presentation. Readers can try clicking the link for “Corporate Presentation” under “Quick Links” at the bottom of the following

page: https://ir.axogeninc.com/.

Axogen’s corporate presentation promotes an addressable market size of $2.2B, with its

core extremity trauma market – the vast majority of the company’s revenues – comprising

$1.5B, or roughly 70%, of the total figure. Given AXGN’s paltry revenues today, this massive

TAM is the foundation of the bull case. We note that the company increased its TAM to $2.7B

on its recent investor date, but we use the size in the presentation as it provides citations.

Small market size: AXGN’s claims

https://content.equisolve.net/axogeninc/media/d1d80ffaa79b3ed207f2594d25be4ebc.pdf


31

AXGN 2017 10K filing

“We estimate that the Extremity Trauma portion of the Market is approximately $1.5 billion.The estimated size of

the Extremity Trauma portion of the market is based upon epidemiological studies regarding the general number of

trauma patients, physician interviews and incidence of PND in the population. We believe that each year in the

U.S., more than 1.4 million people suffer damage or discontinuity to peripheral nerves resulting in over 700,000

extremity nerve repair procedures…”

To support its claim of a $1.5B market in extremity trauma, Axogen states that there are

1.4MM peripheral nerve injuries annually and 719K peripheral nerve procedures. We find this

claim remarkable, given that various studies lead us to conclude that there are only 1.7MM

trauma discharges in total in the US and only 28K cases of peripheral nerve injury annually.

This is directionally similar to estimates provided to us by Axogen’s own surgeon KOL’s of

approximately 20K procedures – or 2.8% of AXGN’s purported statistic. We examine AXGN’s

assertions in more detail before we detail a more credible and robust methodology.

Small market size: AXGN’s key assumptions

Source: Axogen corporate presentation, dated June 30, 2018, https://content.equisolve.net/axogeninc/media/d1d80ffaa79b3ed207f2594d25be4ebc.pdf. Red highlights added by us as emphasis. The


page: https://ir.axogeninc.com/; AXGN 2017 10K.


https://ir.axogeninc.com/


32

In order to understand how Axogen’s could arrive at a figure as improbable as 719K

peripheral nerve procedures, we examined the sole “epidemiological” study that Axogen

cites as its source. The footnote reads “Noble, et al., “Analysis of Upper and Lower

Extremity Peripheral Nerve Injuries in a Population of Patients with Multiple Injuries”,

Journal of Trauma, Vol 45, 2008”.

Small market size: AXGN’s key assumptions

Source: Axogen corporate presentation, dated June 30, 2018, https://content.equisolve.net/axogeninc/media/d1d80ffaa79b3ed207f2594d25be4ebc.pdf. Red highlights added by us as emphasis. The


page: https://ir.axogeninc.com/.




33

• While the footnote in Axogen’s presentation cites the date of the study as 2008, it was actually published in 1998.

• The study examined data from only one regional trauma center, basing it’s conclusions on 5,777 patients treated between

1986 and 1996 at that trauma center. Furthermore, the center was based in a province in Canada, not the US.

• The study concluded that a mere 2.8% of the 5,777 patients treated over 10 years at this center had peripheral nerve injury:

“From a trauma population of 5,777 patients treated between January 1, 1986, and November 30, 1996, 162 patients were

identified as having an injury to at least one of the peripheral nerves of interest, yielding a prevalence of 2.8%.”

• A more recent and comprehensive study on the prevalence of peripheral nerve injury, which we shortly discuss in detail,

concludes that the rate of injury is 1.64% of trauma patients, lower than the 2.8% finding from Noble, and criticizes

Noble’s methodology as flawed. This study utilized a more robust data set of 16mm US individuals, vs. the 5,777 in

the Noble study in Canada, stating that “Our rates are lower than those reported in previous studies examining cohorts at

tertiary trauma centers, and they likely reflect the population rates more accurately than single centers. Previous studies

involving tertiary care centers with a higher proportion of patients with severe trauma reflect a referral bias. Therefore, those

PNI rates are not generalizable to the whole population.”

Our observations from the study

Source: https://www.ncbi.nlm.nih.gov/pubmed/9680023; “The Incidence of Peripheral Nerve Injury in Extremity Trauma,” American Journal of Physical Medicine &

Rehabilitation, 2008, https://www.ncbi.nlm.nih.gov/pubmed/18334923.

We proceeded to locate the Noble et al study, as the entire bull case on AXGN appears to

rest on the massive market size imputed from this paper. We conclude that Axogen’s

materials grossly misrepresent the study, which makes no mention of 719K extremity trauma

procedures annually nor does it provide any support for such a claim. The study concludes

the exact opposite: that peripheral nerve injuries as a percentage of trauma cases are

extremely infrequent.

Small market size: questionable claims by AXGN on key study

https://www.ncbi.nlm.nih.gov/pubmed/9680023


34

Study #1: A comprehensive review of 21MM traumatic injury discharges in the US over 10 years, published in 2016

• The study concluded that extremity

nerve injuries comprised 0.46% of

all severe trauma injuries.

• The database was obtained from

the US Agency for Healthcare

Research and Quality (AHRQ)

Healthcare Cost and Utilization

Nationwide Inpatient Sample

• “We believe it presents one of the

fullest, most expansive recent

pictures of a critically important

cause of morbidity and mortality

in the US.”

Source: “Traumatic Injury in the United States: In-Patient Epidemiology 2000-2011”, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5269564/

In order to arrive at a more realistic market size estimate, we reviewed the medical literature,

which points to only three credible studies on rates of peripheral nerve injury. Each

indicates that the prevalence is miniscule and a fraction of the numbers asserted by Axogen.

The first found that <0.5% of severe trauma injuries resulted in peripheral nerve injury.

Small market size: studies on prevalence of peripheral nerve injuries


35

Study #2: A study of peripheral nerve injury (PNI)

prevalence specifically, with a meta-review of six other studies on rates of PNI.

Study #3: A study of 16mm insured individuals,

employing ICD codes to calculate peripheral nerve injuries.

• “[T]his study, for the first time, provides a measure

of the scope of incidence rates for nerve injuries in a

large, national population.“

• “Our findings reveal that significant peripheral nerve

injuries are rare in people with limb trauma, with an

overall rate of 1.64%. These low rates were likely related

to the fact that nerves require considerable trauma to be

injured, and that for people with uncomplicated fractures

- the primary type of injury incurred - nerve injuries are

infrequent.”

• “Our rates are lower than those reported in previous

studies examining cohorts at tertiary trauma centers,

and they likely reflect the population rates more

accurately than single centers. Previous studies

involving tertiary care centers with a higher proportion of

patients with severe trauma reflect a referral bias.

Therefore, those PNI rates are not generalizable to the

whole population.”

Source: “Nerve injury in severe trauma with upper extremity involvement: evaluation of 49,382 patients from the TraumaRegister DGU® between 2002 and 2015,” Scandinavian Journal of Trauma,

Resuscitation and Emergency Medicine, 2018, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6131878/#CR5; Source: “The Incidence of Peripheral Nerve Injury in Extremity Trauma,” American

Journal of Physical Medicine & Rehabilitation, 2008, https://www.ncbi.nlm.nih.gov/pubmed/18334923.

A comparative study found rates between 0.6% to 3.3% depending on the data set, with an

average of 1.79%. A third study, focused on the US, concluded that the rate is similar at

1.64% of trauma patients, and indicated that peripheral nerve injuries are “rare” and

“infrequent” even in limb trauma patients.

Small market size: studies on prevalence of peripheral nerve injuries

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6131878/#CR5


36

524 per 100,000 population

Key assumptions

• Average annual rate of trauma discharges in the US from 2000-2011

─ “The average annual rate of trauma discharges remained steady

at 524.3 per 100,000 population” between 2000 to 2011

• Implied total trauma discharges per year, using 326MM US population 1,708,240

1.64%• Peripheral nerve injury prevalence in trauma patients

─ Prevalence indicated by most the most recent and credible US

study.

─ A second check is a comparative study of six other studies on

rates of PNI, which points to an average of 1.79%

Source: “Traumatic Injury in the United States: In-Patient Epidemiology 2000-2011”, “The Incidence of Peripheral Nerve Injury in Extremity Trauma,” American Journal of Physical Medicine & Rehabilitation, 2008,

https://www.ncbi.nlm.nih.gov/pubmed/18334923; “Nerve injury in severe trauma with upper extremity involvement: evaluation of 49,382 patients from the TraumaRegister DGU® between 2002 and 2015,”

Scandinavian Journal of Trauma, Resuscitation and Emergency Medicine, 2018, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6131878/#CR5; Seligman interviews/expert consultations, estimates, and analysis.

• Implied total number of PNI cases annually 28,015

50%• Percentage of PNI cases where nerve allograft is an option

─ Surgeon interviews indicate that most nerve injuries are small gap

and can be repaired without use of autograft or allograft

─ A certain percentage of surgeons prefer autograft and remain

opposed to cadaver allografts

─ Therefore, 50% is an aggressive and unrealistic assumption as

the likely percentage is far smaller, but we apply it to be generous

• Axogen nerve allograft ASP, using average of the smallest and longest

lengths ($1500 for 15mm, $6000 for 70mm)$3,750

• Resulting total addressable market $52MM

The data in these studies yields a total addressable market for Axogen’s nerve allograft of

$52mm in its core trauma PNI market, and explains the mystery of why sales of Axogen’s

flagship allograft product are a mere $39mm by our estimate, 11 years after product launch,

despite widespread adoption by surgeons. This is in stark contrast to promoted TAM figures

as high as $17B. We estimate further that are only 28K peripheral nerve injuries annually,

compared to AXGN’s specious claim of 1.4MM.

Small market size: market size calculation

https://www.ncbi.nlm.nih.gov/pubmed/18334923

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6131878/#CR5


37

We spoke with eleven former employees of Axogen, encompassing a broad sample of sales

reps, area managers, executives, as well as former independent distributors. They describe

describe widespread skepticism within Axogen of the company’s promoted market size and

describe the numbers as “comical,” “flawed,” and “misleading.”

“For market size they throw out a $1B+ number quite a bit. They took all peripheral nerve injuries and defined them as a revenue

generator. They added up all the CPT codes and came up with a number in the billions. It’s not true. It’s comical. All the reps

know that. It’s fluff. It’s not realistic. It’s maybe a $150-200mm market. It would be the kiss of death if anyone questioned

that number. No one in middle management can challenge it or make a joke about it. Have to say yes ma’am and do your job and

make sure you keep it.” – Former sales rep

“I’ve always been highly critical of the $2B nerve market size. It’s a highly flawed number. I in no way believe that. I know

where that number came from and it’s based on hospital admissions, percent of reported nerve cases, a lot of if’s. When you look

at the clinical side, things like nerve palsy etc. are self resolving and the rest are simple repairs that don’t need Axogen’s product.

There is a lot of conversation among Axogen’s reps about the market size figure. It’s a misleading number.” – Former

sales manager

“I follow the space closely. The big difference is – the Magellan consulting study [that sized the market for Axogen in 2013]. It said

the market is $1.2B. $1.2B captures every peripheral nerve surgery with any nerve coding it. Johnny goes into the hospital with a

sore wrist and carpal tunnel and scar tissues. There are a ton of carpal tunnel procedures done in the US. Hundreds of

thousands. None will ever use Axogen for that. I’ve pitched 50 surgeons to use Axogen in carpal tunnel and they laugh at

you. They say it’s a 98% success rate and why would I spend more on Axogen than I get for the procedure. Axogen counts all

those. If they pulled the coding for procedures with implants that were used, not just any nerve work, that’s a $1B difference.” -

Former sales rep

“The rest of the market is a couple of decades of work. What’s accessible today is trauma, which is most of their business. The

difficulty is accessing the market opportunity and doing market development.” – Former employee

Source: Seligman interviews/expert consultations

Small market size: comments from former employees (1/2)


38

A former area manager provided additional color into why peripheral nerve repair is a small

niche, aside from the extremely infrequent prevalence of such injuries in the first place.

“In each territory at Axogen, there are 1-2 key customers. A lot of doctors and orthopedic surgeons and plastic surgeons

didn’t want to deal with nerve repair. The outcomes have been so bad over the years. Only 1-2 doctors in an institution will

do nerve repair cases. They may not believe in the technology or technique or they’ll say I can just harvest a nerve [from the

patient]. There are not many doctors doing this. Every hand surgeon will do carpal tunnel surgery. It’s quick and generates a lot

of revenue. They can do 6-10 carpal tunnel cases in a day and know the outcome. With a peripheral nerve case you don’t see

outcome for 8-10 yrs. It’s very technique dependent.”

“Why wouldn’t more doctors in my territory do more of this? Doctors stop learning nerve repair techniques as they get older. Or a

hospital dictates what they can use. It’s an uphill battle. Or they just take a nerve from the ankle and put it in the wrist or hand.

They say why spend money on this. Just do a nerve transfer instead. We were given strong advice and encouragement to tell

doctors it’s as good as an autograft. Whether they believe me is different.” – Former area manager

Small market size: comments from former employees (2/2)



39

The widespread skepticism of AXGN’s promoted market size among its employee base is

shared by surgeons that we interviewed. We note that these surgeons are likely biased in

favor of the company, as they are some of AXGN’s highest-volume KOL’S and in many cases

are recipients of significant payments from the company, per the Open Payments database.

• Peripheral nerve injuries are “a niche.” This surgeon, one of Axogen’s highest volume customers, estimated that there are 2,000

hand surgeons in the US seeing an average of 12-15 nerve injuries per year, indicating a total number of 24K-30K peripheral

nerve injuries annually in the US, consistent with our estimate of 28K using various trauma studies, which produces a market

size of $52MM.

“Why are Axogen’s graft revenues only $35mm? These injuries just aren’t that common. A private practice down the

road may see 3-4 nerve injuries a year while I see them weekly. High volume centers take care of nerve injuries. Nerve

injuries are just not common like carpal tunnel or other problems that hand surgeons take care of. Peripheral nerve

injuries aren’t even in the top 30 for injuries coded by nerve surgeons. It’s a niche. That’s what you see in the

numbers. You can whittle the market down by the number of hand surgeons. The average surgeon is seeing a nerve injury

once every 3-4 weeks. Maybe 12-15 per year. About 2,000 hand surgeons nationally sounds right.” – Surgeon in middle US

• A second surgeon, also a high volume KOL and a speaker for Axogen, independently arrived at a figure of 20K nerve cases

annually, which we note is significantly lower than our estimate of 28K.

“Say there are 2,000 hand surgeons in the US, and some with hand training who take call at trauma centers. But using 2,000,

say the average hand surgeon takes care of 5 hand injuries per month. So that’s 60 per year per surgeon, and maybe 10 of

those per year with a nerve injury. Then, do they have availability of allograft, which I have on hand. Sometimes a rep isn’t

there and you can’t get it in time. 20,000 nerve cases per year is a ballpark. That’s probably a reasonable estimate.” –

Surgeon in eastern half of US

• Another surgeon, who has presented papers for Axogen in the past, provided an alternative market sizing methodology using

CPT codes plus the number of peripheral nerve injuries per level one trauma center. Given that there at most 250 level one

trauma centers in the US, this results in a market size well below our generous estimate of $52MM.

““I do have the numbers for total nerve procedures. It’s good data based on CPT codes. The typical surgeon [user], a

hand specialist in a trauma center, a large university center, will see more cases. It’s still not more than 15-20 cases per

year for an average level 1 trauma center. 15-20 large segment gaps per year would be a maximum. [...] This work was

part of a PhD dissertation. It’s not published, but the data is public” – Surgeon in eastern half of US

Small market size: comments from surgeons (page 1/3)



40

• The same surgeon described Axogen as a niche trauma product concentrated primarily at a few academic hospitals, as private

practice physicians tend to avoid nerve cases.

“As far as my colleagues and peers, I hear that surgeons like the product but folks in private practices don’t take

complicated nerve cases with long recoveries. They refer these cases to university centers. My colleagues in private

practices and academic centers in DC, Maryland, VA use Axogen for segmental nerve defects. But the case volume is

limited. These kinds of injuries are not common. Breaking a bone is much more common. Axogen is basically a trauma

product used in academic facilities, when it comes to large segment defects. […] It’s easy to obtain and use, but it’s a relatively small market.” – Surgeon in eastern half of US

• A hand surgeon at a major medical institution and a large customer confirmed that the vast majority of AXGN usage is at trauma

centers, and that its use is limited among both private practice and university doctors.

“80% of the cases where I use Axogen are acute or sub-acute, meaning trauma cases less than two weeks old. Private

practice doctors are not going to see this as much […] Guys at universities don’t do a lot of nerve cases. It’s

concentrated at trauma centers and only some universities. A guy doing carpal tunnel surgeries doesn’t see a lot of these.” –

Surgeon in western half of US

• Another KOL, one of the most enthusiastic AXGN surgeons that we found, provided another reason for why the market is

miniscule in size: the vast majority of peripheral nerve injuries don’t have a gap and therefore don’t require a nerve graft.

“It’s just the volume of these cases. There’s a 10:1 ratio between lacerations vs. those with a gap. If you cut a nerve and a

tendon, people don’t sit around for 3-4 weeks without seeing a doctor. That’s when you have a gap and need a graft. What

does that say about the market size? Yeah, digital nerve injuries are a small market […] Why are Axogen revenues

so small after 11 years? A lot of nerve injuries can be repaired just otherwise without a graft.” –Surgeon in eastern half

of US

Small market size: comments from surgeons, continued (page 2/3)



41

• One surgeon described Axogen as not just a niche trauma product, but as one best suited best for the even smaller niche of

military trauma, a use case which has faded as Iraq and Afghanistan injuries have declined.

“Now at [institution name redacted], it’s low usage. The indications for use are the same. Nerve gaps. Maybe it’s used once

a month, but I’d be surprised if its even that much. They’re just not seeing patients with segmental nerve problems

who need a graft.” –Surgeon in eastern half of US

Small market size: comments from surgeons, continued (page 3/3)



42

Former AXGN sales reps, area managers, and distributors corroborated surgeon feedback

that Axogen is a niche product concentrated at academic level one trauma facilities, and

moreover is concentrated in peripheral nerve injuries in the hand. In territory after territory,

we received feedback that just one or two level 1 trauma facilities comprised the vast

majority of that territory’s revenues – a red flag given the limited number of such facilities

nationally.

“The vast majority of the territory’s revenue comes from extremity trauma. As far as the concentration profile, level 1 trauma

centers are the biggest accounts. They get the majority of the injuries. 60-70% of my revenue are those centers. For Axogen I

would guess that 80-90% of their revenue is upper extremity and trauma centers are 70%.” – Former sales manager

“The largest opportunity in my territory was level 1 or 2 trauma centers. I sold to hand surgeons.” – Former sales rep

“I had 15-20 accounts in my territory. One major account [at an academic facility] was almost 45% of the revenue.” – Former

independent distributor

“65-70% of the revenue in my territory was at one level 1 trauma facility, an academic facility. Cost is not as significant a

factor at academic institutions.” – Former independent distributor

“80% of my business was ten accounts. $800-900k total revenue in my territory. Level 1 and 2 trauma hospitals. My key

customer was [hospital name redacted]. It was $400k per year. My second largest was $200-250k.” – Former independent

distributor

“I had 35 accounts. [Name of academic center redacted] was easily 65% of the business in my [territory]. Next biggest was

[an academic level 1 trauma center]. Another 10%. Everyone else maybe $5-10k/month.” – Former sales rep

“80-85% of the business was hand surgery.” – Former sales manager

Small market size: comments from former employees on limited use cases and customer concentration



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97-103

104-109

110-114

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Aside from a market size of $2.2B to $2.7B, the second leg of the bull case hinges on

Axogen being early in the adoption cycle among surgeons. We note a variety of comments

from the CEO on the Q3 earnings call on Oct. 29 strongly promoting this notion, despite the

flagship product having been introduced in 2007.

“We have a foundation in our core trauma market that we believe is still at early stages not with depth of penetration. […]

Obviously, if you want to become the standard of care, you need to move into the middle adopters. And the majority of our

businesses is very clearly with innovator and early adopter surgeons. And I would say across the country, you would

typically be looking at a penetration level that we're just not at yet to be able to comfortably say that you're into middle

adopters and that's you're usually looking at something in the 15% to 16% range, starting to push that into that middle

adopter group. […]

And so I would say we're catching the interest of the middle adopters. It is very hard to time when middle adopters will make a

change, but I am comfortable to say that they're at least aware that we're in -- that we've entered into peripheral nerve repair and

that there's change going on and they're starting to follow us. They may not be doing the algorithms yet, but they're starting to follow

us out there, so that they don't get behind. And so I think that's an exciting trend for us to watch, but I still would say that the

majority of our business is with those early adopter surgeons, that's who our current surgeons are today.”

Market penetration and growth potential: comments from Axogen’s CEO

Karen Zaderej, Axogen CEO (emphasis added):

Source: Capital IQ earnings call transcript, 10/29/2018


45

Market saturation and growth challenges: comments from former employees (1/2)

Contrary to the CEO’s claims that Axogen is still at the early stages of penetration in its core

market, former employees – especially sales reps – consistently indicated to us that Axogen

is close to saturated and that new accounts and growth are becoming increasingly difficult

to find. We find the discrepancy with the CEO’s claims to be remarkable.

• 90% of hand surgeons – Axogen’s core market – are aware of the product and 70-80% use it, in sharp contrast to the CEO’s

comments that the company is only penetrated “at something in the “15% to 16% range.”

“Hand surgeons use this product. Ask 10 surgeons, 9 have heard of it, 7 or 8 use it. More than half of ones I know, use it.

The significant majority of usage is by hand surgeons.” – Former employee

“Axogen is in the mainstream with doctors. It’s a different set of challenges now.”- Former employee

“The Avance nerve graft is definitely mainstream. You don’t have to explain the product anymore. Every hand surgeon

knows who Axogen is.” – Former sales manager

• Several former reps and distributors indicated that new customer acquisition is falling and that Axogen is rapidly running out of

growth options.

“The number of new customers is on the way down. The number of new big customers is declining. Axogen won’t

secure a ton of new business. It’s partly due to pricing. A trauma hospital’s price for a case goes up if they use this. It costs

the hospital for nerve grafts. A trauma case could cost $25k [if they use the product]. Getting a new customer of magnitude is

far and few between. The cost of sales is huge. In peripheral nerve trauma, the market is flattening out. The company

has been around for 13 years and still not made it to $100mm in sales.” – Former independent distributor

“I think Axogen is close to saturated. All the docs I’ve talked to around the country think that they’re saturated.

There’s no next step, no innovation. Everyone has the perception that Axogen is trying to sell. Unclear how much longer

they can maintain this growth rate. Only so many nerves you can do. There’s a perception in the market that the company

is desperate to sell. I wasn’t blown away by quality of competence of management at Axogen. Weren’t investing or building

infrastructure. Same nerves, same old song. Two years ago they crossed a bridge in convincing surgeons to do motor nerves

not just sensory. Now they’ve already captured that opportunity. No place else to grow.” – Former independent distributor

“Growth is now more challenging to achieve. It is hard to achieve.” – Former sales rep



46

• A former rep echoed concerns around “saturation” and indicated that his territory reached maturity a year ago.

“My penetration in extremities is extremely high. I reached a saturation rate in my territory. I had to expand to other

markets. I had to move to smaller markets. I had 80% of the extremity trauma business […] Extremity is the bread and butter

of peripheral nerve. It’s saturated. […] [The] market is very mature. Things became saturated a year ago.” – Former

sales rep

• A former rep indicated that saturation has led Axogen to a “tipping point.”

“The market is more saturated. They can’t grow like before. They’re at the tipping point on price right now. I see them getting

to $100-120mm in revenue in 5-7 years. Growth will slow because the price increases won’t be there. In [a major metro] they

kicked Axogen out. They won’t pay them. Axogen played hardball. They lost the account a year ago. It was a KOL account.” –

Former sales rep

• Another former distributor pointed to hospital consolidation and scrutinization of Axogen contracts by group purchasing

organizations as a driver for the market flattening.

“My market became flat because of a contracting issue with [the largest hospital system in my territory]. If no

contract with them, no access. They’ve taken over a large volume of facilities. Contracting has become more of an issue.

GPO contracting was not an issue for nerves before, but over the over last year or so there’s been a push to scrutinize

it. There are some markets in my territory where Axogen could grow but not that much.” – Former distributor

Market saturation and growth challenges: comments from former employees (2/2)



47

Market saturation and growth challenges: comments from surgeons (1/4)

In addition to former employees, even Axogen’s most enthusiastic and high volume

surgeons provided unequivocal feedback that is sharply at odds with the CEO’s claims on

early penetration, and echoed concerns around market saturation and future growth.

• Surgeons corroborated comments by Axogen’s former employees that the company’s products are widely known and well-

penetrated in its niche, especially among high volume surgeons who comprise the vast majority of the market.

“In my circle, I have 30 surgeons in a hand surgery club. All 30 of us use Axogen. It definitely has widespread usage.” –Surgeon in western half of US

“Surgeons are definitely aware of Axogen. It’s widely known. It’s not new.” – Surgeon in eastern half of US

“In the last five years I’ve seen tremendous growth in Axogen’s awareness. Used to be that maybe 1 or 2 hands would go

up if you asked at a conference. Now pretty much three-fourths of the hands in the room know their products and

have some experience with them. It’s been adopted.” –Surgeon in middle US

“Most high volume hand surgeons today, level 1 trauma center docs, are all people who stay current with newer

[nerve] implants. I do know some at high volume facilities who are reluctant to use allograft, but most are quick to use it

today.” –Surgeon in middle US

• Surgeons indicate that residents and fellows have already been widely trained to use Axogen in recent years, and that cadaver

nerve allograft is already the standard technique, versus autograft nerve harvested directly from the patient.

“Over the past ten years, all my hand fellows have been using Axogen. Ten years ago there were none. Over the last 5-

6 years, they all use it. Fellows have all used it in residency.” –Surgeon in western half of US

“As far as market awareness and adoption, I’m on a panel at the hand society. Even one and a half years ago, the algorithm

for nerve injury was still autograft. People were skeptical of allograft utility. The skepticism was not because it doesn’t work,

but because nerves don’t do well even if a nerve is fixed. […] Allograft is now the gold standard for graft. Everyone in

training now or trained in the last 3 years automatically uses allograft now. It’s already almost become the standard

of care for small nerve gaps in the arm.” –Surgeon in middle US



48


Even among Axogen’s highest volume surgeons – ones that comprise the bulk of procedure

volumes in the market – Axogen is used infrequently. Surgeon after surgeon indicated that

their usage of Axogen’s products, already low as a percentage of their total procedures, is

maxed out, providing further evidence of saturation and a negligible market opportunity.

• One of Axogen’s most prominent surgeons uses the company’s core product in only 30-50 procedures annually out of 500-800

total. His usage has actually declined over time.

“I do 500-800 procedures per year. 30-50 a year use Axogen Avance graft alone. If I include their Axoguard line, then it’s

another 20-30 procedures with a wrap. I started using it in 2010. […] Early on I used more Axogen. […] I’m at steady state

with my Axogen volume.” – Surgeon in eastern half of US

• These comments are echoed by other Axogen KOL’s or speakers, whose usage of Axogen remains small relative to their total

procedure volumes. All three are at academic centers with clusters that are among Axogen’s largest accounts.

“I started using Axogen five years ago. The majority of my use is trauma. I do 750 procedures per year. I average two to

three Axogen events per month. 30 cases per year with an Axogen product. I’m maxed out. All my partners – 4 doctors

– use it maximally.” – Surgeon in western half of US

“I do 4-500 surgeries per year. I use Axogen once every 2 weeks. 20-25 Avance grafts annually, maybe 30-40. I started

using Axogen five years ago. As far as my colleagues, there are 10 surgeons here. Half of them use it. Collectively we use

more than 200 allografts per year.” – Surgeon in eastern half of US

“My practice in the next 2-3 years won’t change. I and my partners are at capacity for Avance usage.” - Surgeon in

middle US

• Another Axogen advocate, at one of the highest volume trauma centers in the US, also indicated modest overall usage despite

being a recipient of payments from AXGN and working with a cluster of pro-Axogen surgeons.

“40-50% of my practice is peripheral nerve surgery. I do 500-600 procedures per year. My allograft usage is about 50-75

cases a year, maybe a little more. My mean volume is 1.25 grafts per case. I mostly use 5cm grafts, 50-75% of the time.

Some 3cm and 7cm. The mean length is 3-4cm. I started using Axogen 5-6 years ago seriously. […] Among hand surgeons at

[hospital name redacted], every one of us uses Axogen though to different degrees. It’s a similar algorithm to me for trauma.

Globally speaking, the other surgeons do 20-30% of my volumes. I do more procedures than they do in general, and a lot of nerve surgeries, so people send me those patients. I’m the go to guy for nerve repair.” – Surgeon in eastern half of US



49


These pro-Axogen surgeons further indicated that their volumes are unusual and

unrepresentative – despite being small to begin with – and that there are few surgeons who

could support even these limited volumes.

• We again quote one of Axogen’s most prominent surgeon users

“[I do] 30-50 procedures…annually with an Axogen graft […] There are less than 20 surgeons in the country with my

practice profile. I don’t see growth for Axogen with hand surgeons. If Axogen stopped doing their education series,

their growth would stop. […] I just don’t know if the volume is out there with hand surgeons. People aren’t doing my

volumes. I’m an anomaly.” – Surgeon in eastern half of US

• The same surgeon indicated that Axogen has no international market opportunity. We note that Axogen has virtually no

international sales, given obstacles to using cadaver parts in other countries.

“Axogen is not even on the radar overseas. Cadavers are less accepted and the payors different.” – Surgeon in

eastern half of US



50

“My volume is about 700 procedures per year. Most are elective. Some hand trauma. Majority are soft tissue injuries.

Compression neuropathy, neuroma. Of the 700, the majority are upper extremity. Hand is 60%. I don’t use Axogen’s connector. I

use their Avance nerve graft. I use Integra’s Neuragen tube. My preference is still autograft. I only use Axogen a few times a

year. Less than 10 cases per year. […] I started using their allograft at least 5 or 6 years ago. I’ve always had small usage.

It’s my personal bias. Most surgeons think autograft is better. If you have a nerve injury, people want to use their own

nerve to graft it.” –Surgeon in eastern half of US

“Axogen’s claims about operating room time reduction are partially true. However, harvesting an autograft nerve from the

patient doesn’t take that long. If someone is diabetic I’ll use allograft because the foot is hard to heal. Allograft is costly. If I need

a 40 cm graft, I can get it from one side. You’d need 6-7 pieces of allograft which would cost a fortune. Allograft is maybe

economical for a small gap, where you can pay $1-2k. The reduction in operating room time doesn’t justify paying for

Axogen. An ankle autograft takes a few minutes. Maybe 10-15 minutes. If no one’s waiting for the room it doesn’t matter.

If a second surgeon is helping in the procedure it doesn’t take any extra time.” - Surgeon in eastern half of US


In addition, we spoke to high volume surgeons who still prefer autograft and are unlikely to

switch to AXGN’s allograft product. Although our research indicates that AXGN has

widespread awareness and adoption in its niche of addressable surgeons, other surgeons

remain resistant and challenge AXGN’s claims. We conclude that surgeons open to AXGN

already began using it 5-10 years ago, and those who still don’t are highly unlikely to do so.



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Table of contents




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3-16

17-28

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51-63

64-71

72-75

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87-96

97-103

104-109

110-114

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52

Negligible opportunity in breast neurotization: market sizing analysis

Axogen promotes an addressable market size of $250mm for breast neurotization. The

company lists a variety of questionable statistics without explaining how they lead to this

figure.

Source: Axogen corporate presentation, dated June 30, 2018, https://content.equisolve.net/axogeninc/media/d1d80ffaa79b3ed207f2594d25be4ebc.pdf. The URL currently yields an error page

although we have a hard copy of the presentation. Readers can try clicking the link for “Corporate Presentation” under “Quick Links” at the bottom of the following page: https://ir.axogeninc.com/.




53

2017 Plastic Surgery Statistics Report • There are two major types of breast reconstructions.

─ Implant-based using saline or silicone implants

─ Autologous reconstructions, which use tissue from the

patient’s abdomen or back to reconstruct the breast

─ Only autologous reconstructions, not implants, are

neurotized

• Implant-based reconstructions comprise 82% all procedures,

eliminating the largest segment as a market for Axogen.

• Of the remaining reconstruction procedures that are autologous,

only a subset known as DIEP flaps are typically candidates

for neurotization.

─ Blood vessels called deep inferior epigastric perforators

(DIEP) are removed from the lower abdomen and transferred

to the chest, along with the attached skin and fat.

─ DIEP is muscle-sparing, unlike other flap techniques like

TRAM or latissimus flaps, which move muscle tissue into the

reconstructed breast.

• DIEP flaps comprised only 9,495 procedures in total, or only

8.9% of all breast reconstructions.

• The ASPS data matches feedback from Axogen’s own KOL

surgeons, who indicated to us that the vast majority of breast

reconstructions are implant-based and that neurotization is a

technique limited to niche surgeons doing DIEP flaps.


The most accurate data on potential market size is from the American Society of Plastic

Surgeons 2017 Plastic Surgery Statistics Report, which we combine with estimates provided

to us by Axogen’s most enthusiastic and high volume surgeons in breast neurotization to

arrive at a more realistic figure.

Source: American Society of Plastic Surgeons 2017 Plastic Surgery Statistics Report


54

0

20,000

40,000

60,000

80,000

100,000

120,000

All reconstructive breast procedures Autologous procedures only

• Total DIEP flaps

• Percent of DIEP flaps that are candidates for

neurotization, as estimated by one of

Axogen’s highest volume, early adopter

surgeons, who indicated that this is an

aggressive assumption.

• Percentage of neurotizations that use

autologous nerve vs. cadaver allograft,

surgeon estimate.

• Implied addressable neurotization

procedures, which is consistent with surgeon

feedback on upper limit annually assuming

market adoption

• Total # of breasts neurotized, using ASPS

estimate that 65% of reconstructions are

bilateral.

• ASP, based on average length of 40mm

• Total addressable market size for Axogen

nerve allograft in breast neurotization

9,495

50%

50%

2,374

3,917

$4,000

$16MM

Key assumptions / TAM calculationAll breast reconstructions by type

106,295

19,316Other flapTRAM flap

DIEP flap

Latissimus flap

9,495

Silicone

or saline

implants

Autologous


The total number of DIEP flaps annually sets an absolute ceiling for neurotization

procedures. When adjusted for other limits provided by Axogen’s own surgeon KOL’s, our

an analysis indicates that the total addressable market size in breast neurotization is only

$16mm, a mere fraction of the $250mm promoted by AXGN.

Source: American Society of Plastic Surgeons 2017 Plastic Surgery Statistics Report, Seligman estimates and analysis


55

Former employees express deep skepticism that breast neurotization is a meaningful new

segment for AXGN, citing a trivial market size, lack of interest or outright resistance from

doctors, a dearth of clinical data, and rejection from hospitals due to pricing and

reimbursement problems.

Negligible opportunity in breast neurotization: comments from former employees (1/2)

• A former employee threw cold water on AXGN’s opportunity in breast neurotization, as well as other markets beyond its niche in

hand trauma.

“I worry that Axogen is distracted from their largest market which is extremity repair. Breast is interesting but it’s a

small market. People are not repairing nerves there. It will be glacially slow. I spoke to great breast surgeons. You won’t

sell a nerve graft until you convince them that restoring nerve sensation is important. You have to convince them to first fix a

nerve, and then have to convince them to use your product. It’s slow to grow, and also not a big market. The prostate

market sounded good. There’s a lot of prostate cancer. But when you look at the rate of radical prostatectomy, it’s a

shockingly low number. And then when you look at the skill required to re-attach nerves in prostate anatomy, it’s really hard.

Only the most advanced surgeons could do it. And there’s no reimbursement. It wouldn’t move the bottom line. Breast

reconstruction only applies to free flaps which are a small percentage of total reconstructions.” – Former employee

• Former sales reps describe great difficulty in getting breast reconstruction surgeons to use Axogen’s products, and no repeat

usage by the surgeons they convinced to trial it.

“The breast reconstruction opportunity is a challenge. I reached out to some breast docs. There’s not much data

behind it. It’s a theoretical sell. It’s almost a promotional tool for early adopter facilities. I’ve spoken to [several] facilities.

A surgeon was receptive. He has done one procedure. However the market is trending strongly toward implants, not TRAM or

DIEP flaps. Docs are not doing many flaps and that’s where our program was targeted, and there’s no data on implant

reconstructions.” – Former sales rep

“The feedback on breast is all over the place. Some docs didn’t think it was a big deal. Others thought it was too hard. I didn’t

get any docs using it for breast. I had some microsurgeons who were curious but data was sparse. They weren’t

sold on all that extra time in the operating room and the added cost after a procedure. I’d have exploratory

conversations. There were some champions, and maybe get a case here or there. I got a couple of breast cases but

nothing where they’d do it again.” – Former sales manager



56

Negligible opportunity in breast neurotization: comments from former employees (2/2)

• The increase in operating room time from adding neurotization to a breast reconstruction procedure was cited by multiple

research sources as a driver of surgeon resistance, among others.

On breast neurotization, the plastic surgeons I spoke to were skeptical of it. Very few reconstruction patients would

want it. It’s technique sensitive and leads to added time in the operating room.” – Former independent distributor

• A former sales manager indicated that hospitals would have to eat the cost of an allograft out of their bundled payment for a

reconstruction procedure, and therefore prevent doctors from using AXGN. A former rep corroborated reimbursement and cost

as massive impediments.

“Hospitals have prevented more than one breast reconstruction case because of reimbursement issues. The cost of

the nerve implant comes out of the global payment and facilities recognize that the hit is large. Facilities need more clinical

confidence and reimbursement.” – Former sales manager

“Breast is not reimbursed at all. You could use $18k of nerve in a breast case. Hospitals don’t like that. You’d use a

long graft and connectors on both end. They’d bill $14-20k for the nerve implant. That’s not reimbursable.” – Former sales rep

• A former sales rep indicated that AXGN has managed to interest only a small number of surgeons nationally, and pointed to a

limited number of surgeons that reps could even target.

”Breast is a very early program. There are no more than 15-20 docs doing it. In my territory, there were only 2 potential

targets for breast. They thought it was too early.” – Former sales rep



57

We believe AXGN investors may be unaware of the regulatory risks of “off-label” or “gray

area” usage in breast and other add-on markets the company is promoting, as AXGN has yet

to even finish enrolling a clinical trial for its largest use case of extremity trauma, much less

submit a BLA or receive FDA approval despite launching its product 11 years ago.

Negligible opportunity in breast neurotization: regulatory risks

• We cover this critical issue in a later section, but we note that in the absence of a completed trial or BLA, AXGN operates at the

mercy of the FDA under the agency’s “enforcement discretion.” We believe that the letter indicating the application of

enforcement discretion was issued in 2011, well before the company’s current effort in promoting breast neurotization as an

indication, leading us to question whether these efforts are in compliance with the letter’s scope.

─ When AXGN launched its product in 2007 it attempted to do so under the FDA’s 361 human tissue pathway, which

bypasses requirement for a clinical trial and BLA. However, the FDA instead determined that Avance was a biologic

product subject to Section 351 requirements for a clinical trial and BLA submission.

─ The FDA allowed AXGN to continue selling its products in the meantime under the understanding that such a trial would

be conducted and that a BLA would be submitted, under a transition plan with various conditions.

─ We question whether the FDA would consider breast neurotization to be within the current “label” or scope of the

enforcement discretion status under which AXGN operates. Labels are a critical feature of FDA approvals, specifying how

and when devices or drugs may be used by doctors. AXGN, to the best of our knowledge, has never publicly disclosed the

FDA letter specified in its 10K or the allowed scope for its allograft.

─ We believe this poses a massive risk for the company, as any violation of the FDA conditions under which it operates

could result in AXGN being forced to withdraw its current products from the market. We are skeptical the FDA would

support new indications such as breast neurotization when the company has yet to finish enrolling a trial or submit a BLA

for its original indication 11 years after product launch, and 8 years after when we believe the letter was issued.

• This concern appears known to AXGN’s sales reps, as one of them called usage in breast reconstruction a “gray area” that is

“not indicated.” The rep hinted that off-label usage may be a more widespread problem for AXGN generally.

“Breast is off label so [the company] shouldn’t push that. Breast is a gray area. It’s not indicated. It’s not

reimbursed.[..] Axogen doesn’t know what indications their product is used for. They have no idea what it’s used for.

They have tracking forms. When they get mailed in, they’re filed away. They don’t scrutinize every one of them.” –

Former sales rep

Source: AXGN 10K; Seligman interviews/expert consultations


58

Negligible opportunity in breast neurotization: comments from surgeons (1/3)

In addition to AXGN employees, surgeons express similar skepticism about any meaningful

opportunity in breast neurotization. We again note that these surgeons may be biased in

favor of the company, as they are some of AXGN’s highest-volume KOL’S and in some cases

are recipients of payments from the company, per the OpenPayments database.

• A prominent breast reconstruction surgeon who is a KOL and an early AXGN adopter indicated that neurotization is a well-known

concept but that other surgeons aren’t interested in the procedure.

“Reneurotization is very well known. Everyone knows about nerve grafts. […] It’s not an education issue. Surgeons just

haven’t incorporated it. They think that either the outcomes don’t justify it, or they view it as unnecessary […] It’s just

a niche addition to DIEP flaps by certain surgeons. High volume doctors are not trained in breast neurotization. It’s slow to

permeate. Microsurgery training is needed for abdominal flaps and reneurotization [...] It’s a very niche procedure.” – Breast

reconstruction surgeon in western half of US

• The same surgeon practices at one of the largest academic centers in the country, in one of the largest population clusters in the

US. He pointed to the small number of surgeons even in this cluster who do autologous reconstructions, and an even smaller

subset that are open to neurotization, indicating that the number of addressable surgeons is negligible.

“There are two docs at [my academic center, name redacted] that do autologous reconstructions. Only I do neurotization. In

[my metropolitan cluster, name redacted] there are 8-10 surgeons who frequently do autologous reconstructions. Of these 8-

10, I’m one of 2 who routinely neurotizes flaps. Maybe one of 3. All three are comfortable with Axogen.” – Breast

reconstruction surgeon in western half of US

• These comments were echoed by another breast reconstruction KOL, who we believe to be one of AXGN’s highest volume users

in neurotization, as well as a third surgeon KOL who indicated essentially no interest in the surgeon community.

“Most surgeons or women don’t ask for neurotization. [The women] don’t even know there will be lost sensation.” –

Breast reconstruction surgeon in eastern half of US

“No patient has ever asked for neurotization. It’s just not on my radar. No one in our entire area does neurotization […] I

go to a lot of breast meetings and I speak as a KOL for a graft company. I see a lot of different practices in different

areas. No one is talking about neurotization. Doctors are focused on getting a healthy skin flap and getting a quality

reconstruction. That’s the primary concern.” – Breast reconstruction surgeon in eastern half of US



59


• An enthusiastic early adopter of AXGN’s graft for breast neurotization is a self-described anomaly who doesn’t even know what

the product costs. We estimate that a few other surgeons who are similarly unrepresentative of the broader market comprise the

only surgeons who use the product. This surgeon mentioned another well-known proponent of neurotization, and indicated that

the other surgeon wouldn’t use AXGN”s core product due to cost.

“I’m definitely an early adopter. Everyone knows it. […] I have no idea how much the Axogen graft costs. I don’t care

about price or cost. [Surgeon name redacted] only uses the connector. She doesn’t use the graft because of its

cost.” – Breast reconstruction surgeon in eastern half of US

• Surgeons pointed to lack of specialized training and skill level as other obstacles to breast neurotization becoming a meaningful

opportunity

“When you’re getting even more detailed around sensation, it assumes you have a really good general surgeon who

preserves your skin flap vs. butchering it. I have a very good general surgeon [who works with me]. I doubt he could

identify and preserve nerves for me. I do latissimus flaps myself. If I do a TRAM flap, one of my surgeon partners does it.

One of us works on the chest and one on the abdomen. Typically that’s how it’s done at university centers and private

practices. Not always though. Some people use a well trained physician assistant. […] I’m well trained in microsurgery, so

that’s not an issue for me.” – Breast reconstruction surgeon in eastern half of US

• A fourth KOL, the most pro-Axogen surgeon we could find, felt the breast opportunity was many years away, in spite of his

enthusiasm for anything that AXGN does.

“How long will it take for the breast opportunity? It depends on the data that comes out. I’d guess it would be about five

years until data comes out. And people will wait for the data.” – Surgeon in eastern half of US

• Axogen’s KOL surgeons independently arrive at a total addressable market size of about 2,000 neurotization procedures

annually, similar to our estimate of 2,400, which implies a graft market size estimate of $16MM even by one of the few surgeons

bullish on its potential.

“3-4% of abdominal flaps are reneurotized today. That will increase significantly over 5 yrs. I’d say 25% will be neurotized.

[S]ay 8,000 DIEP and TRAM flaps is the total upper limit. So that’s 2,000 reneurotization procedures per year.” – Surgeon

in western half of US



60


• Surgeons pointed to the lack of a reimbursement code for nerve graft as another major obstacle and indicated that although

there is a procedure code for the surgeon’s time (vs. the cost of the graft itself), the level of reimbursement is small and fails to

provide a financial incentive for surgeons to do breast neurotization. One indicated that even the facility only gets reimbursed

$2500 for a flap, providing no ability to absorb the $6,000 cost for a 7cm AXGN graft.

“[Axogen’s graft] is not cheap. There’s no insurance code for it. The cost is paid by the facility. Whenever I use it, it

the facility pays for it. I have to submit it to the Value Analysis Committee […] I bill a CPT code for each part of the procedure.

For reconstructions/DIEP flaps, there’s a separate CPT code for reneurotization. For nerve grafts, the code reimburses me an

additional amount. The reneurotization code is not economically significant vs. autologous reconstruction. It’s done

for patient benefit not financial benefit to the surgeon. Luckily it’s only a small add on. If I use a nerve graft, it’s another

20-30 minutes added to the procedure. There’s no financial reward in any way for the surgeon. The autologous

reconstructive free flap is an average reimbursement of $5,000 per side. If I add reneurotization, it’s another $500 or so per

side. Some of us have carve outs w insurers and negotiate a price.” - Breast reconstruction surgeon in western half of US

“I’m an employed physician paid on RVU’s reimbursement levels set by Medicare. It corresponds to real world

reimbursement. We get $2,500 for a TRAM flap, as the surgeon fee, $1800 for a tissue expander. Ratio is the same. Now I

probably get $1,000 per side.” - Breast reconstruction surgeon in eastern half of US

• We note that even one of AXGN’s most enthusiastic surgeons, an early adopter in breast neurotization, uses cadaver nerves in

only a small percentage of his procedures and prefers to use nerve harvested from the patients vs. a cadaver.

“All I do is breast reconstruction. I publish and speak a lot. Annually I do 500-600 operations. Of say 500 annual

procedures, 75 are free flaps. That’s autologous reconstruction. Commonly, lower abdominal skin is what’s used. The same

area that’s removed with a tummy tuck. We just keep it vs throwing it away. Of the 75 free flaps, I reneurotize 30-40 of which

half are Axogen. So I use Axogen in about 20 cases annually […] The most common way to reneurotize is to use nerve

from the patient. You can find nerve in the abdomen or chest. […] Of the reneurotizations that are done [in the market], 50/50

are donor vs. autologous. My Axogen use is a high percentage of my flap reconstructions. It’s not a typical practice

pattern. The typical surgeon is still 50/50 autologous nerve vs donor. Most do less reneurotization. I’ll use autograft from

the patient if one is available. If the nerve is available in a surgery site, I’ll use it. If it’s not available, I’ll use a graft

when I need an expandable and long enough length.” - Breast reconstruction surgeon in western half of US



61

Negligible opportunity in oral/maxillofacial surgery: comments from former employees (1/2)

In addition to breast neurotization, AXGN promotes the market opportunity for cadaver

nerves in the oral surgery market. The company pitches it to investors as a key indication

and growth driver, yet various statements indicate that it already expanded into the market

in 2012, with further comments in 2015 indicating a roll-out was well underway. We have

seen no evidence of meaningful traction since then, and former employees dismiss the

opportunity, similar to their skepticism of breast neurotization.

• The CEO stated in 2015 that the company began roll-out to its target market of 200 oral/maxillofacial surgeons in 2014.

Karen Zaderej – May 2015

Yes, good questions. So we entered into the oral maxillofacial space in midyear of last year, and it is a very

concentrated market. So the people we are targeting are the surgeons who are referral practice, who repair these injured

nerves. Typically, they're at academic teaching hospitals. There are about 200 of these specialists who are

microsurgically trained in the oral maxillofacial field -- oral maxillofacial market today […] We actually had a new

publication come out from Dr. John Zuniga in the early part of the year supporting use of Avance Nerve Graft in these types of

injuries, showing results up to 7 centimeters, or 70 millimeters, and that's been received well by this community and we

continue to roll out to those specialist surgeons.

• A former independent distributor indicated the opportunity was marginal and that AXGN has exhibited no ability to expand beyond

it’s core market in extremity trauma. He further indicated the there is no international opportunity for the company.

“There is only some marginal growth in breast and oral. The company can’t even bridge into other specialties. As far as

European growth, Axogen is not even a player there. The European market cannot support the price and reimbursement.

Axogen is perceived as desperate to get into other areas. No upper extremity company is going to buy them.” – Former

distributor

• A former sales rep pointed to multiple problems in accessing the oral market: lack of data, lack of interest by oral/maxillofacial

surgeons, and the need for much longer nerve lengths in the face than what AXGN sells or has proven to be clinically viable.

“My business was mainly hand surgeons without a doubt. Occasionally an ENT microsurgeon. We had no data for

oral/maxillofacial past 5cm and you need 12cm for the face […] I dealt with a lot of oral and maxillofacial guys who could put

feeling back in the face and they said I don’t care if it’s a little numb. I just care about getting the cancer out so a little

numbness is not a big deal. I got no traction in oral/maxillofacial. Most surgeons don’t want to do those cases. They want to

be in and out. Last thing they want to do is regenerate the nerve.” – Former sales rep

Source: Seligman interviews/expert consultations; Capital IQ earnings call transcript


62

Negligible opportunity in oral/maxillofacial surgery: comments from former employees (2/2)

• A former sales manager provided similar feedback on the lack of a meaningful opportunity

“On oral and maxillofacial, I had one specialist interested. It’s a much smaller market. There are only three oral/maxillofacial

surgeons in the territory with any volume. The learning curve is slow. Nice to have, not must have. The other facilities won’t

embrace it.” – Former sales manager



63

Limited commercial potential for new indications and products: Avive product line

In addition to its Avance nerve allograft and complementary Axoguard connectors and

wraps, Axogen sells the Avive soft tissue membrane product. Avive consists of small sheets

sourced from human umbilical cords. The product was launched in 2016 to compete with

MiMedx and we estimate that that it contributes a negligible amount to Axogen’s revenue.

Ex-employees exhibit skepticism of the product’s commercial potential, and KOL surgeons

express alarm at the clinical data and AXGN’s sales practices.

• A high volume KOL surgeon, part of a cluster of surgeons that comprises one of AXGN’s largest accounts, exhibited high concern

around the clinical data behind Avive, as well as what it indicated about AXGN’s business practices and culture. We note that a

surgeon in this group has presented clinical papers in the past on behalf of AXGN.

“What worries me about Axogen? […] They’re trying to push too much vs. making the allograft the center of their universe.

The Avive umbilical product has no clinical data to support its use and they’re pushing it so hard that it scares me.

They’re trying to sell it for a problem that doesn’t exist. That scares me. I’m not sure of the latest turn at the

company. There’s no clear cut definition of its uses though they’re selling it. They’re saying this promotes long term

improvement in nerve healing with literally the worst data to support it. They’re using old prostate data to support it. It

makes me cautious. They just produced a product, and they’re not sure what it’s for, and saying try it.” – Key

surgeon account

• A second surgeon, also one of AXGN”s largest accounts and a speaker for the company, echoed these concerns.

“Their amniotic-based products were pushed too aggressively. It distracted their reps.” – Key surgeon account

• A former distributor for the company and an ex-employee indicated that the Avive is a me-too knockoff in a commodity space.

“Amniotic companies are popping up everywhere. Everyone has an amniotic product. It’s used in nerve, soft tissues,

etc. The product has third party packaging from the same company. Axogen was losing some of their market share, so they

launched an amniotic product. They won’t come down on price and all other companies are. So Axogen goes to a new facility

and committees and try selling there.” – Former independent distributor

“Axogen felt the most competition was from umbilical cord matrix. A company in Atlanta [MiMedx]. There were questions

about the integrity of the guys behind it. Axogen was worried about the competition from these products. Axoguard is licensed

from Cook. Amniotic products do the same thing, and many surgeons prefer amniotic material. So Axogen added an amniotic line.” – Former employee



64

Table of contents




nerve injury market




















3-16

17-28

29-42

43-50

51-63

64-71

72-75

76-86

87-96

97-103

104-109

110-114

Pages


65

Unsustainable price increases: comments from former employees (1/3)

Aggressive, annual price increases have been a key driver of AXGN’s revenue growth. With

prices doubling in just a few years, we believe investors may be unaware of the role of price

vs. volume in driving AXGN’s results, given the company’s scant disclosure. Former

employees indicate that this strategy is unsustainable and at a breaking point. One implied it

was a short-term approach to keep the stock price high, describing it as “let’s torch this

market and get out.”

• Former sales employees and distributors indicate that prices are unusually high, with 7cm nerve strips selling for over $6,000.

“The longest Avance graft is about $6,000 for 7cm. It comes in 15mm, 30mm, 50mm, 70mm lengths, and then diameters

of 1-2mm, 2-3mm, 3-4mm, and 4-5mm. So there are about 4 lengths and 4 diameters. 7cm lengths with 3-4mm or 4-5mm

are more robust and cost $6,200 to $6,300. 7cm with a smaller diameter was $6,000. The 5cm length was $5,000. The

3cm was $2,800 and the 15mm was $1,500 to $1,600. Axoguard products started at $700 to $1400 and had the same price

though different diameters up to 7 mm. The wraps were a bit more expensive, about 30% more than tubes.” – Former sales

manager

“Axogen’s pricing is way out of line.” – Former distributor

“Our pricing for tubes and wraps is more expensive than the competition.” – Former sales manager

• Prices have increased substantially and are a key driver of AXGN’s growth, while volumes have lagged. Former reps indicate 10-

20% price increases as routine and some SKU’s as high as 40% per year, with a doubling in ASP’s over the past 3-4 years.

“The shortest Axoguard tube was $700. It went up 40% each year. It’s now at $1400. The Avance 7cm graft went from

$3100 to $6200.” – Former sales manager

“The published list price on connectors is $1600-1700 for smaller ones. For protectors larger ones are at $2400, starting at

$1800. Smaller connectors are $1200-1300. Larger connectors are $1500-1600. Some sku’s have doubled in price.

Axogen has been very aggressive in price increases relative to the medical market. The most common lengths for

Avance autograft are 2-3mm. So put a premium on 3-4mm, 4-5mm lengths.” – Former sales manager

“A lot of Axogen’s growth is from aggressive price increases. At some point the market won’t bear that and they’re

at that point now. Some hospitals and centers are getting angry and saying we won’t pay for that. They’re not growing quantity as much.” – Former sales rep



66


• Numerous former reps indicate that AXGN’s price increases are alienating hospitals and surgeons, leading to tension with

customers and cancelled accounts.

“Axogen is exploiting their unique position in nerve allograft cost or price wise but pissing a lot of people off, including

surgeons and hospitals.- Former independent distributor

“The reactions to price increases got pretty ugly. Hospital administrators would complain.” – Former sales manager

“Axogen provides zero discount if not some revenue minimum. Just list price. No one wants to pay list. Axogen is feeling

pressure across the country on pricing. They think a $200k account is nothing. They barely discount on the east and west

coast. They even have 400k accounts with no discount, so they definitely wouldn’t do it in my territory […] [The academic

center that was 45% of my territory’s revenue] comes hard at surgeons on cost. Surgeons were using two nerves plus

wraps. Surgeons told me they need a lower price. Axogen wouldn’t do much. We did a 5% increase vs. 15%. Axogen

does 1 year contracts and raises the price every year. Facilities don’t like that. On average, it’s a 15-20% price

increase every year. They say they only raise it 6% but that’s not the case.” – Former independent distributor

• A former sales manager stated that these concerns are escalating and reaching a breaking point. The comments are

corroborated by former reps and distributors who state that the price increases are accelerating customer defections.

“We’ve been removed from accounts after price increases and then negotiated our way back in. Axogen is not a friend at

the largest institutions. There is disdain toward the company. Most institutions have issues with consistent high price

increases and the lack of contract incentives. Axogen rarely writes contract over one year. They won’t guarantee pricing.

Hospitals and IDN’s have taken notice. Hospitals are used to 50% discounts and when they get only a 5-15% discount for

significant volume, they’re taken aback relative to other medical markets. Sensitivity to Axogen’s price increases is now

higher. Negotiations are getting more intense every year. Price increases will have to get close to 3-4%/year vs. double

digit every year. The annual price increase over the product line is 10-15% every March.” – Former sales manager

”I worked with [a large hospital system] to try and get a contract and they wouldn’t finalize it. Axogen’s new price increase

may lead [them] to say remove your protectors and connectors. Some of my surgeons have moved over to Integra

recently. I have a hard time with Axogen’s board and decision making.” – Former independent distributor



67


• Most ominously, former reps shared their belief that Axogen’s aggressive pricing has created so much alienation that its customer

base could defect en masse, with a “race to the bottom” in pricing. Comments indicate that competitors already sell on cost vs.

clinical benefits, and that AXGN customers are already using these competitors as leverage.

“There’s a cap on how much Axogen can grow. There is acceptance of their product but also dissatisfaction that they’re

charging as much as they can. The seeds of discord have been sown. As soon as there’s a competitor, customers

will shift […] It’s so easy to compete [against Axogen] when it’s all about price. There’s nothing to differentiate Axogen. The

doctors don’t care. No loyalty. If someone cuts Axogen price by 50%, it will be a race to the bottom.” - Former

independent distributor

“The pricing has grown so exponentially that it leaves Axogen vulnerable to someone dropping the price or

someone with modest pricing. Ambulatory surgery centers will always open their door. We lost major accounts because

of pricing. Sometimes they would come back or sometimes not. Not sure how long that will last. You can only turn your

back on so many customers. Their technology is muddled by economics.” – Former sales manager

“At [a prominent academic center] the account was greater than $1mm. The price increase was difficult to take. They

threatened the Axoguard business but didn’t give it to Integra. They do have leverage with Axoguard though. Several of our

KOL’s are at [this center] so they backed it. [My second largest account] didn’t have KOL’s so it didn’t work.” – Former sales

rep

“Integra and Stryker sell on cost not clinical outcomes. They say we can sell protectors and wraps at half the cost.

There are a lot more of those cases than allograft […] In the eyes of facilities, it doesn’t matter as long the product does the

job. A qtip is a qtip. It’s all about cost. Facilities don’t care about clinical benefit. The reimbursement rate is all that

matters. Axogen’s products are significantly more expensive. Other companies have longer wraps that are more cost

effective.” - Former independent distributor



68

Unsustainable price increases: vulnerability in the ASC channel (1/2)

Price sensitivity in the ambulatory surgery center (“ASC”) channel poses a critical threat to

Axogen’s business. ASC’s are non-hospital outpatient surgery centers, which comprise a

large and growing share of procedure volumes in AXGN’s core market. Surgeons often own

these facilities and have a vested interest in diverting volumes away from hospitals. Former

AXGN employees as well as surgeons indicate that Axogen is shut out of this market due to

aggressive pricing and lack of reimbursement, and is therefore dependent on a small

number of level 1 trauma centers – typically academic centers willing to eat the cost of

AXGN’s product themselves.

• Former sales reps and other ex-employees we spoke to universally pointed to lack of acceptance by ASC’s as a significant

vulnerability in AXGN’s business, with ASC’s owning 40-65% or more of the procedure volumes in territories we queried.

“What worries me the most about Axogen? A lot of these cases are happening in ASC’s. They will lose that business

[…] A lot of docs are trying to take things to surgery centers. Some have financial interests in their centers. We had a really

hard time with ASC’s. So the company’s strategy was to focus on trauma centers and level one’s. Reimbursement was the

reason. ASCs were transactional. Hospitals could swallow it. The company’s strategy is level ones but the field would tell

them more and more [procedures] go to ASC’s.” – Former sales manager

“It’s much more difficult to be doing Axogen in ASC’s. Axogen is priced out. Doctors like to do fingers at ASC’s.

They can do more cases per day and they own the center. Even if you say use Axogen for two cases per month, the

business manager will say you can’t use it. Occasionally you can get workers comp. In my territory, easily 65% of hand

surgeries were done in ASC’s.” – Former sales rep

“Axogen has a very concentrated customer base in trauma centers. The business may move to surgery centers as

doctors line their pockets. Then they can’t get an Avance graft there because it’s a premium product […] Surgery centers

are different. They have a set fee, so they have to pay the bill [for Axogen] from one charge. They can’t eat up $1,400

[procedure fee] with $10,000 of Axogen products.” - Former independent distributor

“A lot of hand surgery is done in outpatient clinics but they’re not friendly to expensive implants. Our cheapest

product is $1500 and it’s a hard sell in a surgery center. Try telling a surgeon he has to schlep to a major hospital to get

reimbursed. We were getting booted out of surgery centers all the time. They’d say I’m only using it for the worst cases and at a hospital.” – Former employee



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Unsustainable price increases: vulnerability in the ASC channel (2/2)

• Comments from former sales reps on ASC’s, continued

“Axoguard products are not priced for private surgery centers, which was the bulk in my state. They had no buy in.

Doctors say that the cost of Axoguard is more than the cost of reimbursement for the procedure. They only used us in

the rarest of circumstances like workers comp.” – Former sales rep

“An orthopedic hand surgeon can do 5-6 cases per day at a center. Every year I was there Axogen would say they’d get a

code for ASC’s. 40% of the market was surgery centers when I was there. Surgery centers are the most sensitive about

price. They stop doing it if you keep raising the price. Axogen has talked about reimbursement codes for years.” – Former

sales rep

“On reimbursement, most patients are inpatients at trauma centers. The cost is part of the global payment, whether

commercial or medicare, so trauma facilities are the sweet spot for Axogen. In an outpatient scenario, Axogen’s world

changes. Docs are trying to move procedures to outpatient facilities, to hospital owned surgery center or outpatient

discharge. There are three types of care: in-patient, with a global bundled payment; hospital outpatient or hospital owned

ambulatory, where rates are higher than ambulatory but less than bundled; and then ASC’s which have the lowest carrier

reimbursement. They just get a procedure fee. Very few ASC’s have implant carve outs. Axogen isn’t usually available

there.” – Former sales manager



70

“I’m shielded from cost as a university doctor. I’ve done some cases at a surgery center that our university partially

owns, and there I’ve been told that Axogen is too expensive and I can’t use it.” – Surgeon

“Our main hospital which picks up the cost of the allograft. [Hospital name redacted] doesn’t come to us with cost issues.

If I use it our main hospital, it’s been ok. Totally different deal at ASC’s.” - Surgeon

“On pricing, I feel fortunate that in my setting I don’t have to face any price concerns. It’s never brought to my

attention. It’s unusual vs. other places. It’s just the nature of the beast at my facility. I’m not in private practice. I don’t have to

think about reimbursement.” - Surgeon

““I’m definitely an early adopter. Everyone knows it […] I have no idea how much the Axogen graft costs. I don’t care about

price or cost.” – Surgeon

Unsustainable price increases: dependence on high volume surgeons that are unrepresentative of the market

During our interviews with surgeons, we were struck by how consistently high volume users

and KOL’s for AXGN described themselves as being in the unusual position of being able to

ignore price, a luxury afforded to only a few doctors at certain universities. Our research

indicates that Axogen’s business is limited to a small number of anomalies that are shielded

from the economic realities of cost and reimbursement, or who are recipients of Sunshine

Act payments by AXGN, further explaining the company’s negligible revenues 11 years after

product launch. Each of the four surgeons quoted below is a high-profile KOL and/or

speaker for the company, and we note the difference vs. their experience at ASC’s.



71

Unsustainable price increases: reimbursement challenges

Our interviews with former employees and surgeons indicate that AXGN has severe

reimbursement challenges, another reason why sales are modest 11 years after launch.

Although this is partly due to the product lacking FDA approval, reimbursement experts

indicate that as a product used in a hospital in-patient scenario, FDA approval will not

meaningfully improve AXGN’s reimbursement profile. We believe that selling a high-priced

product with aggressive annual ASP increases into an unfriendly reimbursement

environment is a perilous strategy with a short shelf life.

• Numerous former employees and distributors bluntly summarized the company’s reimbursement situation.

“They don’t get insurance reimbursement for Avance. Hospitals pay for it directly.” – Former employee

“A lot of insurers call this experimental and won’t reimburse it.” – Former independent distributor

• We believe that the core of AXGN’s reimbursement and business problem stems from its products being used in an in-patient

hospital setting, given its dependence on trauma centers, and that even potential BLA approval would result in minimal

improvement to its reimbursement profile and revenues.

─ Broadly speaking, there are two types of reimbursement: pharmacy benefits and hospital or in-patient benefits.

Pharmacy benefits are outpatient, such as going to CVS to fill a Lipitor prescription. In-patient covers what occurs within a

hospital and is an entirely different type of reimbursement.

─ In-patient benefits are typically covered by negotiated service contracts between insurers and hospitals, which

employ bundled payments or DRG codes. For example, an insurer may agree to pay a hospital $5,000 for a nerve

repair. The insurer doesn’t say that we’ll pay $11,000 if you use a $6,000 Axogen nerve graft. The insurer still pays

$5,000, and the hospital has to eat the cost of the graft.

─ The core of AXGN’s problem is that hospitals have to eat the cost of the graft out of their bundled payment, and

therefore have powerful incentives to avoid using AXGN products. As a result, we believe that AXGN is left as a

niche product at certain academic level one trauma centers and is shut out at ASC’s and virtually everywhere else.

─ Reimbursement experts indicate that even if AXGN were to someday receive BLA approval, its reimbursement

profile will not meaningfully change given the nature of in-patient hospital vs. outpatient pharmacy benefits. If

AXGN sold a prescription biologic like Humira, BLA approval would result in automatic coverage and expand its market.

As an implant used in a hospital procedure, however, BLA approval does not change its reimbursement status, which is

governed by contracts between insurers and hospitals. BLA approval has no effect on these contracts, and the

bundled payment for a nerve repair remains the same whether AXGN has BLA approval or not.



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nerve injury market




















3-16

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51-63

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“In each market that Axogen has tried to penetrate, they have started with KOL consultants. They’re expected to use the

product.” – Former independent distributor

“I’ve called on [this academic center] for a number of years. [It] is one of Axogen’s largest accounts. They don’t come

right out and say we’ll only use your product if you do a trial with us. They’ll say, “If you want to do a lot of business, it’s

good to have our staff speaking about your product and doing research. I suggest you have the company do more research

with us.” You find out that they do speaking and research for those companies where they do a lot of business. Axogen used [this

account] for studies. We provided money for their programs. All this was viewed very favorably. Axogen wouldn’t get near

as much business if they didn’t give them this money.” – Former sales rep

“15-20% of Axogen’s revenue is from centers doing the trial.” – Former independent distributor

“Axogen’s biggest accounts are in [state redacted]– their surgeon speakers. Those accounts are huge. People doing their papers

are their largest volume accounts. Five to six of them. Three years ago, 75% of Axogen’s business was high volume

accounts. The reps handling those accounts are doing $1mm per in business or more.” - Former independent distributor

Elevated risks relating to pay-to-play and anti-kickback laws

Former employees and distributors indicated that surgeons receiving payments from AXGN

are critically important to the company’s revenues, a dynamic we find troubling, as we have

observed other medtech and pharma/biotech companies become the targets of

legal/regulatory action based on allegations of violating anti-kickback laws.

Source: Seligman interviews/expert consultations; AXGN 2017 10K

AXGN 2017 10K:

“In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,

offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an

individual, or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part

under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties

and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare

programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the

healthcare industry.”


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OpenPayments lists the top ten physicians receiving payments from AXGN, for the five

years through 2017. The data indicates that these doctors received 44% of AXGN’s total

reported general payments of $1.6MM in 2017, indicating a high risk that AXGN’s sales

volumes may be concentrated at a relatively small number of surgeon groups. A former

sales rep estimated that one of the surgeons in the list may be a $2MM “if not $3MM”

account. Given that AXGN’s LTM revenues are only $78MM, the risk of dependence on a

small number of high volume surgeons who receive large payments from AXGN is self-

evident.

• We read the names of the top ten recipients to a

former sales rep: “All the KOL’s you just named are

some of their biggest users – the top ten.” Other

former sales reps corroborated individual names as

some of AXGN’s largest accounts.

• The same rep commented on a name in the top five:

“I’d be surprised if it’s not Axogen’s largest

account. It’s got to be >$2mm if not $3mm.”

• Another former rep corroborated the dependence on a

few surgeons, indicating that of his 30-40 active

accounts, five surgeons were the majority of his

territory’s revenue, adding that “It’s all about getting

one surgeon.”

• The surgeon at the top of the list presented key,

favorable clinical data for AXGN at the American

Society for Surgery of the Hand in September 2018.

• Some top recipients have spoken at AXGN’s annual

analyst and investor days or other events.

OpenPaymentsData.CMS.gov chart listing top 10 physicians

receiving payments from AXGN in 2017.

Source: https://openpaymentsdata.cms.gov/company/100000005414/payment-information, Seligman interviews/expert consultations

Doctor #1

Doctor #2

Doctor #3

Doctor #9

Doctor #4

Doctor #7

Doctor #5

Doctor #6

Doctor #10

Doctor #8

Although the data is publicly available, we mask each name to respect

physician privacy.

https://openpaymentsdata.cms.gov/company/100000005414/payment-information


75


We compared the total general payments listed on Open Payments for AXGN to those of

other companies, and analyzed them as a percentage of revenue for the past 5 years. 2017 is

the latest data available. AXGN stands out as an outlier, spending a remarkable percentage

of its revenues on payments relative to RTI, its closest comp, as well as versus other

companies that overlap with its product offering or which AXGN describes as competitors,

such as Integra (IART), Stryker (SYK), and Baxter (BAX).

Total General Payments Listed on OpenPaymentsData.CMS.gov, As A Percentage of Company Revenue

Source: https://openpaymentsdata.cms.gov/, Capital IQ, Seligman calculations

https://openpaymentsdata.cms.gov/


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Looming competitive threats: comments from former employees and distributors (1/3)

Although AXGN is currently the only company in the US selling nerve strips harvested from

cadavers, our interviews with former employees indicate a high degree of concern about

imminent competitive threats, encompassing identical cadaver grafts coming in 2019, more

advanced nerve conduits, upcoming product launches from Integra and Baxter, as well as

newer technologies, given that AXGN introduced its product in 2007.

• A former employee pointed to fear within the company, stating that the company worried most about Integra (NASDAQ: INTG),

as well other orthopedic companies that could bundle cadaver tissue with other products in their portfolio, while AXGN as a niche

vendor had nothing else to bundle with.

“Axogen is worried about competition. It was the topic of every management meeting. There was a lot of concern

about data and keeping surgeons in Axogen’s camp, which is another reason why SunShine Act payments [from

Axogen to surgeons] are elevated. The CEO in particular was worried that other companies would steal away Axogen’s big

surgeons. She was worried that Axogen created the market and created doctors ripe for the picking by other companies. We

did lose some surgeons to Integra and some smaller companies. Karen [CEO] worried that Axogen couldn’t offer surgeons

that much, like the prestige of being a consultant to a big company. She hoped that surgeons would stick with Axogen even

though it’s a small company […] Axogen was also aggressive with price increases on the Axoguard line despite substitutes. I

would have done that differently. Integra owned most of the market and was the competitor we worried about. They are

multiples larger than Axogen and have a lot more resources. Axogen is worried about them more than any other

company. […] We were worried about Integra putting resources behind this and beating Axogen down. It was always a

concern. We worried about orthopedic companies in general offering tissue as part of their product portfolio. They

would have had the ability to bundle tissue with other operating room products. Axogen has nothing to bundle with.

We talked about that a lot.” – Former employee

• A former sales manager echoed competition from Integra and highlighted rumors of a new product coming to market.

“Avance’s competition is autologous grafts.There are rumors of Integra’s multi-lumen conduit – a conduit with an internal

structure, same as Axogen’s Avance graft. It’s been approved for a while. I hear rumors of it coming to market. It’s a collagen

conduit with multiple lumens. It has an internal structure vs. a hollow tube. It’s a more advanced conduit.” – Former sales

manager



78

• A former distributor indicated that tissue banks – from which Axogen purchases strips of cadaver nerve – are working on

entering the market and going direct themselves in 2019. More ominously, he indicated that they plan to compete on price.

“I’ve spoken with tissue bank companies, which at least profess knowledge to process human nerve and cleanse them of

antigens. The competition is coming. People are working on it. I’ve spoken with two companies who will compete

just on price. One competitor that I spoke with is actively, aggressively pursuing this. The other one is sizeable and

they’re coming. It’s absolutely realistic that they will compete. In 2019 I expect to an alternative cadaver graft. I was

impressed by them, no hubris. They were very confident. I was impressed with the rep I spoke with. He may have worked

for Axogen at some point. Absolutely knew they could do it […] [T]he competitor said he understood the cleaning [of nerves]

very well. There is than one way to do it […] Axogen’s price is inflated, and sure they’re the only player [in nerve allograft] but

that creates significant downside. Competition is definitely coming. The value of the rest of portfolio is really questionable.

There are other players out there with better products. Axogen has a short leash on their current product. Surgeons

have the perception that the company is desperate to sell.” - Former independent distributor

• The same former distributor explained why AXGN is uniquely vulnerable to competition. Sales reps in orthopedics and medtech

typically play a critical role in the operating room, serving as surgical technicians or assistants during the implantation of the

device, while AXGN reps play a superficial role beyond the sales and stocking process.

“Axogen reps are not needed in the operating room. There’s no technical relationship. The product is just stored in a

fridge. There is no reliance on the rep or a relationship there to protect the business like there is in orthopedics.” –

Former independent distributor

• A second former distributor corroborated concerns about alternative cadaveric nerve products coming to market, indicating that

surgeons who used to purchase nerves from AXGN are working on an alternative, as is Integra.

“Surgeons are trying to come up with a competitor to Axogen. I have a surgeon down here who hasn’t used our nerve in

a while – he will be part of the development. There are definitely companies looking into this. Integra is looking into

doing things in this market. They are focused on growing skin and nerve.” - Former independent distributor




79

• A former employee expressed concern about Baxter disrupting AXGN with its upcoming launch of a competing product.

Baxter’s Synovis Micro division signed a distribution agreement in August 2018 with a Japanese company called Toyobo, to

distribute Toyobo’s Nerbridge product in the US. The Toyobo press release announcing the agreement stated that “In 2013,

Toyobo began domestic sales of Nerbridge® as Japan’s first medical device to facilitate regeneration of peripheral nerves

severed or damaged due to external injury […] Since its market debut, Nerbridge® has been used at medical institutions across

Japan […] Synovis MCA will start limited sales of the product as a precursor to full-fledged sales in 2019.”

“My competitive fear for Axogen would be feet on the street from Baxter. They call on lots of hand surgeons. They could

cause disruption if they have enough boots on the ground. Synovis calls on a lot of surgeons.” – Former employee

• Several former reps and ex-employees pointed to the competitive threat from 3D nerve printing and other synthetic grafts,

implying that AXGN’s remaining window was closing.

“There’s a company in France called Gecko Biomedical. They’re in the early stages of 3D printing of synthetics. The 3D

structure of the graft is maintained during cleaning. They have little tubes where axons regenerate […] Other companies are

working on a synthetic alternative. They will compete on more than price. The question is how long Axogen can be

the front runner but it won’t be for long […] Axogen won’t be the front runner forever.” - Former independent

distributor

“Avance nerve graft is the flagship and anchor. With 3D printing, if you can make cells stick to that and measure it, they will

have competition.” – Former sales manager

“A million people are trying to 3D print nerves, do electrical stimulation for nerve repair, and so forth. Competition will come.” –

Former employee


Source: Seligman interviews/expert consultations; http://www.toyobo-global.com/news/pdf/2018/08/press20180820.pdf


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Looming competitive threats: Chinese competition

Beyond Integra, Baxter, and tissue banks going direct with their own cadaver nerves, we

believe that investors are unaware of the most significant threat to AXGN: competition from

Chinese companies, including one which already sells nerve allograft to surgeons in China.

The image below is of the “Shen Qiao” nerve allograft sold in China since 2012 by

Guangzhou Zhongda Medical Equipment. Chinese language articles specifically mention

Axogen as the competing product that Shen Qiao has cloned and improved upon.

“Axogen had concerns about a company in China that was working on a nerve graft. Regulations

there are very different and we were worried about a cheap Chinese import. Our US patents mean nothing there.” – Former AXGN employee

“Processed nerve allograft”

or “Off-the-shelf nerve allograft”

“Shen Qiao”

“Guangzhou Zhongda Medical Equipment”

Source: http://www.zdmed.net/index.php/Content/lists/cat_id/121; Seligman translation may not be exact.

http://www.zdmed.net/index.php/Content/lists/cat_id/121


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Looming competitive threats: Chinese competition

We communicated with a scientist in China involved with the development effort and trials

for Shen Qiao nerve allograft, and spoke with the company selling it. We believe that they

are intensely interested in finding an American partner. We estimate that sales in China will

be USD$6MM this year, ramping to $15MM in 2019 as the company expands to 100+

hospitals. Given that China has a 1.4 billion population and that the product launched in

2012, we find the sales level indicative of the same challenge that AXGN faces in the US: a

trivial market size for peripheral nerve injuries.

• The product was launched in 2012, after clinical trials and regulatory approval in China. Clinical efficacy of 94% appears

meaningfully superior to Axogen’s Avance. A recent paper based on 413 nerve repairs in Axogen’s registry showed 85%

meaningful recovery, according to an email summary we received from AXGN. Quotes below are based on Google translations

of Chinese articles and may not be precise, and we have edited the translation slightly to remove grammatical errors.

“In 1 year, four large-scale top three hospitals in China conducted a controlled clinical trial of 159 patients with sensory nerve

defects of the upper extremities. The results showed that after 6 months of repairing the "Shenqiao " , the excellent rate of

monofilament tactile sensation reached 94.44% […] The therapeutic effect reached the therapeutic level of the traditional

repair method using autologous nerve repair, and no adverse reactions related to the product were found, and no

complications caused by autologous nerve resection were observed.”

• The scientist who developed the product implied that it is superior to Axogen’s, and indicated an intention to lower the price

versus Axogen. Articles in China specifically mention Axogen in reference to the Shen Qiao product.

“Shenqiao” has storage advantages that are not available on the market. According to Liu Xiaolin, “Shenqiao ” can be stored

at room temperature and can be stored for one year […] The same type of products in the United States can only be stored at

below minus 40. In a low temperature environment, the requirements for the transportation environment are much higher. It is

understood that for the current homogeneous materials produced in the United States, the price is about $1200 US dollars

(equivalent to about 7,000 yuan), and Liu Xiaolin said that once the "Shenqiao" [reaches] standard production, the cost will

be lower than the similar materials in the United States.”

“Prof Zhu Jiakai compared “Shen Qiao” with a similar product manufactured by an American company in specifications,

storage and clinical test process, demonstrating that “Shen Qiao” is superior to the similar product in these aspects and

achieves the world’s top level.”

Source: http://www.zdholding.com/a/517.html; http://sysu.edu.cn/2012/en/news/news03/772.htm; Seligman interviews/expert consultations

.

http://www.zdholding.com/a/517.html

http://sysu.edu.cn/2012/en/news/news03/772.htm


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Looming competitive threats: ex-employee comments on AXGN’s Axoguard product line

Most former employees we spoke to were critical of AXGN’s Axoguard line of connectors

and wraps as a commodity product with extensive competition. We estimate that AXGN’s

Avance cadaver nerve graft comprises half of the company’s revenue, with the other half

coming from Axoguard, which is processed strips of pig intestine. The product is owned by

another company and AXGN is the exclusive distributor.

• A former distributor highlighted problems with the materials used as well as the science and data.

“The science and data behind their conduit/wrap isn’t the same caliber […] Docs understand that Axogen wraps and

conduits are not that great. There is data to suggest that the material is not very good.” - Former independent

distributor

• Multiple former reps, employees, and distributors dismissed Axoguard as a competitively weak product line.

“Axoguard products are me-too. Everyone has a [similar] device – Integra and others.” – Former employee

“Integra, Stryker all have tubes and wraps. I’ve heard that Integra is working on a competing product. Tubes and wraps are a

commodity.” – Former sales manager

“My surgeons were users of other products. They used conduits, mainly Integra. They are the market leader. Conduits were

everywhere. Surgeons have no preference.” – Former sales rep


.


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Looming competitive threats: comments from surgeons (1/3)

Surgeons corroborated a variety of competitive threats to AXGN, and highlighted other

areas of worry for investors. The surgeons we quote are all high volume, long time

customers of AXGN who typically also receive fees from the company. We further asked

each of these surgeons if they would personally invest in AXGN today, and received tepid or

skeptical responses without a single enthusiastic reply among the numerous surgeons we

interviewed.

• A surgeon who is a KOL and one of AXGN’s largest accounts highlighted a number of competitive threats and demurred when

we asked if he would invest in AXGN today.

“There are more competitors in the space now. Integra is pushing protectors and wraps as well […] I've been asked

by our accounting folks to trial other competing products as they come out. My purchasers have asked me to evaluate Integra

and others. I like the Axoguard more than the others but if I don’t have Axoguard, I’ll use Integra. Yes, the pressure is there.

We are looking for better cost containment and are looking for competing products […] Would I invest in Axogen

today? It concerns me that they’re a single niche company. Hospitals are looking for single source, portfolio

vendors. What’s saved Axogen is their Avance graft. Wraps and connectors are not unique. It wouldn’t surprise me if my

hospital comes to me and says you have to use Integra. I’ve said, yes I can use Integra if you say I have no choice.

Institutions want portfolio and volume discounts, not a niche vendor.” – Surgeon in eastern half of US

• The same surgeon stated that anyone can replicate AXGN, and mentioned a publicly traded competitor with which he’s had

discussions about a competing cadaver nerve product. We find these comments remarkable from such a longtime and pro-

Axogen KOL. We further note this competitor’s belief that the market may be too small to bother – confirming our view

that the only reason that no other US company sells cadaver nerves today is because the market is negligible, and that

if the market were more than a niche it would have been flooded with competitors many years ago, indicating a no-win

situation for AXGN.

“I did have a discussion with a company that wanted to make an allograft and they asked me if I would use it. They said they

didn’t think the market was big enough for a second allograft. This is a fairly good sized company. You’d know the name. They

have access to nerve tissues. It’s a public company. They’re asked me to come to the company and discuss this more. The

answer is yes, anyone can do this.” - Surgeon in eastern half of US


.


84


• This surgeon further cited Axogen’s murky FDA status as a source of concern, and pointed to xenografts – nerves sourced from

animals – as an another competitive threat, indicating success with 3cm gaps. We note that AXGN’s Axoguard product, which we

estimate comprises half of the company’s revenue, is sourced from pigs.

“I know a couple of institutions working on decellularized xenografts. They’ve done at least two animal studies.

There’s one in the academic space that’s been talked about. Their allograft isn’t as quite as good an outcome – it’s good

for 3cm grafts in animal trials. It’s not on the market now. It’s actively discussed […] At some point I do believe there will be

a competing allograft. The FDA hasn’t given clear indication even to Axogen. That’s made people leery of jumping

into space.” - Surgeon in eastern half of US

• A second KOL, also one of AXGN’s highest volume accounts, shared similar concerns about the relative ease of replicating

Axogen’s product and the inevitability of new entrants.

“At some point in the future there will nerve allograft alternatives. There have to be. It’s not like Axogen is selling

hypertensive medications.” - Surgeon in eastern half of US

• He further indicted that for short nerve gaps – which comprise the vast majority of nerve injuries - virtually any competing

alternative such as hollow tube conduits works well. He also stated that the competing Toyobo product, to be launched

shortly in 2019 by Baxter, will garner interest from surgeons and expressed general skepticism about large parts of

Axogen’s market.

“Toyobo is a newer product. It will get some interest. For a gap greater than 5mm I wouldn’t use a hollow tube. Below

5mm, you can use anything. Any hollow tube construct would work. A race for that space isn’t worthwhile if I was

one of these companies. I do use Axoguard connectors below 5mm. I don’t view that as a market opportunity.” -

Surgeon in eastern half of US


.


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• The view that conduits or any other technique like inexpensive, commodity connectors works well in short gap injuries as an

alternative to nerve grafts was shared by other AXGN KOL’s. This feedback points to the threat posed by Integra and Baxter’s

upcoming launches.

“I’ve used collagen conduits. They’re better in shorter segments of 1cm or less. The results for a finger nerve with a

short segment defect are actually very good with almost any product. Sensory nerves are a small bundle, and if it’s a

short gap, then the results are consistent no matter what you bridge the gap with. When you have more proximal nerves and

motor nerves, conduits struggle when it’s mixed sensory and motor nerves. I’ve used Integra’s Neuragen. It works ok. We

used it for fingers. We used it a lot.” - Surgeon in eastern half of US

“Axogen is mostly used for segmental defects. That’s the #1 scenario. For a small 2-3mm defect, you can use a connector

vs. an autograft. The data shows that under a 5mm gap, a connector is adequate. A majority of the cases are trauma

and segmental.” - Surgeon in western half of US


.


86

Our interviews indicate that Axogen’s sales mix renders it especially vulnerable to new

competition. We estimate that sales have a dumbbell distribution concentrated in both very

short nerve lengths for small nerve gaps, where surgeons state that conduits and other

methods of repairing nerves work just as well as autograft or allograft, and long lengths for

long segment gaps, where surgeons indicate that clinical outcomes begin to degrade.

Looming competitive threats: product concentration creates vulnerability

• The dumbbell distribution of very short and very long nerve lengths was corroborated by a number of former sales reps.

“The most common injury is the finger, which usually needs a 15mm graft. The surgeon could always cut it down to

a smaller size. 15mm and 70mm lengths were the most popular. They were 40% of the business in my territory.” – Former

sales manager

“On Avance, I [mainly] sold two lengths […] 30mm and 70mm.” – Former sales rep

• Surgeon interviews confirm the prevalence of short gaps, as well as poorer outcomes in long gaps. The surgeon below is part of

a cluster at one center, which we believe may be AXGN’s largest individual account.

“The most common injury is digital injury. If you get to it within a week or so, after trimming the healthy ends of the nerve,

the typical gap is 1cm. I use the 15mm graft. It’s my most common one by far and I trim it down […]The efficacy of

allograft in sensory vs. motor nerves? The latest RANGER paper shows equivalence between them. For motor, there was a

large caliber nerve study a year ago. There was new data in January for motor nerves. Once you get to 5 cm, which is a lot

of mixed motor nerve gaps, you’re left with a large gap which is a poor outcome no matter what.” - Surgeon in

eastern half of US


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Aside from a $2.7B addressable market size, the bull case on AXGN hinges on its strong

“intellectual property” position, fueled by assertions from the company that we find lacking

in credibility. AXGN’s filings state that it “expects an additional 12 years of exclusivity” after

its patents expire in 2023, leading investors to believe that the company will have a

monopoly position in a $2.7B market until 2035. Before we examine these claims, we offer

some high level observations.

Fragile and overhyped intellectual property position

• An estimated 50% of AXGN’s revenues come from its flagship Avance nerve allograft product. The other 50% come from its

Axoguard product line, which is owned by Cook Biotech and for which it is merely a third-party distributor. In other words, half

of AXGN’s business is comprised by reselling a commodity, me-too product line in which it holds no IP.

─ Furthermore, AXGN’s filings state that Cook Biotech’s patents on Axoguard have already expired: “[T]he material U.S.

patents covering the formulations used in our AxoGuard® product line, which are held by Cook Biotech, have expired.”

• Common sense indicates that the strength and value of a company’s intellectual property is a function of the R&D investment

required to develop and bring it to market. Under that measure, AXGN’s IP is among the weakest we have ever seen.

─ A scientist at the University of Florida named David Muir developed a method to process cadaver nerves so that they could be

transplanted as grafts. One article suggests that he developed this technique in 1989. Our review leads us to believe that the

original r&d grants required to develop the technique were trivial in size.

─ Axogen licensed patents and intellectual property from the University of Florida Research Foundation. AXGN filed an 8K in

2011 stating that it entered into the license agreement with UFRF in 2006. The 8K redacts the “License Issue Fee” paid to

UFRF, but AXGN”s last 10K provides figures which we believe are indicative: “A milestone fee to the UFRF of $2,000 is due

if AxoGen receives FDA approval of its Avance® Nerve Graft….”

• For a $1.2B market cap company, AXGN has historically spent negligible amounts on R&D, indicating the simple nature of

its “technology” and “intellectual property” – and most importantly, it’s replacement and underlying value.

─ Although the Avance product was launched in 2007, the earliest R&D expense figures available are from 2010 and 2011, of

$436,000 and $697,000 respectively. We presume that R&D expenses in years up to launch in 2007 were even lower.

─ The product sold today appears to us to be identical to that launched in 2007, suggesting that the rise in R&D spend in

subsequent years to $1 to 3MM per year – still negligible relative to most medtech or pharma companies – was driven by

purposes other than further development of its core product.

Source: AXGN SEC filings, Capital IQ data, Seligman estimates, https://ryortho.com/2009/03/repairing-nerves-with-allograft/,

http://www.sciencecoalition.org/downloads/1393519821florida2.0companies.pdf

https://ryortho.com/2009/03/repairing-nerves-with-allograft/


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Four claims form the bull case on AXGN’s intellectual property and its potential product

exclusivity to 2035. If these claims are untrue, we believe the company has no meaningful IP

protection and cannot prevent a copycat from starting a race to the bottom in pricing.


• Claim #1: AXGN has patent protection on its core Avance nerve graft until September 2023

─ The company’s most recent 10K states: “With respect to our Avance® Nerve Graft we have patent protection through

September 2023 in the United States.”

─ We’re not sure how this is viewed as bullish, as it implies that Avance is a product late in its lifecycle with only five years left

on its patents, having been launched in 2007, assuming the patents are even valid.

• Claim #2: After its patents expire in 2020, AXGN will have another 12 years of intellectual property protection left,

providing monopoly-like runway until 2035.

─ Axogen fuels this notion: “…In addition we also expect it will receive Biosimilar Protection that could provide an additional 12

years of exclusivity.”

─ When we emailed the company for clarification, they wrote: “From our regulatory team: BLA exclusivity would occur when we

get the Approval from FDA as a Biologic Product. This is when “first licensure” is in effect.”

─ We believe the company is referring to the 12 year exclusivity period from the date of first licensure of the reference product,

during which a biosimilar (ie, a generic, competing cadaver-sourced nerve graft) referencing AXGN’s Avance cannot receive

approval under a 351(k) abbreviated licensure pathway.

• Claim #3: AXGN is uniquely shielded from new entrants today, as it sells its graft under an FDA transition plan, which

no other entrant would receive without completing clinical trials which would take “8 years.”

─ AXGN initially attempted to launch its Avance graft as a Section 361 HCT/P tissue product, which don’t require clinical trials.

However, in 2010 the FDA determined that it was a biologic which requires a P3 clinical trial and BLA.


a trial and BLA, assuming it follows various conditions.

─ Bulls believe that although the FDA allows AXGN to keep its core product on the market prior to having a completed trial and

BLA approval, no other company would get such a deal from the FDA, a notion promoted by AXGN: “We believe a

competitive processed peripheral nerve allograft would need to complete a BLA Phase I, II and III clinical study prior to clinical

release which we believe would take approximately 8 years.”

• Claim #4: Even if none of the above is true, AXGN possesses trade secrets and know-how in the cleaning and

processing of cadaver-source nerves to make them viable as grafts.

Source: AXGN SEC filings, email from AXGN investor relations.


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We spoke with two lawyers with extensive experience in FDA matters and intellectual

property in medtech/pharma/biotech, in conjunction with an analysis of AXGN’s patents. The

feedback was dismissive of the bull case and leads us to conclude that AXGN’s IP is

essentially meaningless, with no ability to prevent a copycat from entering the market today.

We review the four key IP claims one by one.


• Claim #1: AXGN has patent protection on its core Avance nerve graft until September 2023

─ The company’s most recent 10K states: “With respect to our Avance® Nerve Graft we have patent protection through

September 2023 in the United States.”

Source: AXGN SEC filings, https://patentimages.storage.googleapis.com/e4/70/ac/a4de948d281c7b/US7402319.pdf

The key patent expiring in 2023 is 7,402,319: “ Cell-Free Tissue Replacement For Tissue Engineering”


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This patent – the heart of AXGN’s IP and “trade secrets” – merely provides a checklist for

cleaning a cadaver-sourced nerve in a detergent solution. The scope of the patent is so

narrow and specific that trivial variations on the checklist of steps avoids infringement of

the patent. Bizarrely, the patent is based on the use of one specific brand name of detergent

from Dow Chemical, which was discontinued in 2010 – illustrating the patent’s absurdity.

The discontinuation notice lists several interchangeable detergents – the use of which

automatically avoids infringement of AXGN’s patent.


Source: Seligman interviews/expert consultations; https://patentimages.storage.googleapis.com/e4/70/ac/a4de948d281c7b/US7402319.pdf;

https://dowac.custhelp.com/app/answers/detail/a_id/13484/related/1

• Feedback from an IP lawyer indicates that the patent is so narrow in scope as to be essentially irrelevant.

─ Various methods of cleaning and decellularizing tissue have been well-known since the 1800’s, such as simply freezing and

thawing tissue to break down cell membranes, a process known as lysis.

─ As a result, we believe that the only way to get the patent approved was to make it excessively specific, which avoids prior art

issues around widespread use of detergents to clean tissue, but renders the patent useless in the process.

• The method outlined in step 1 illustrates the ease of working around the patent. If a competitor simply tweaks the sequence in step

1, they don’t violate the patent. Two examples indicate the ease of non-infringement.

─ Example 1: “[S]oaking the nerve tissue for at least six hours in a solution comprising one of more sulfobetaines”

─ A competitor can simply soak the nerve for less than six hours.

─ Sulfobetaines are simply a type of detergent. A competitor can use a different type of detergent with similar properties,

as countless varieties are used in labs. Feedback from an IP lawyer: “It’s like Dawn vs. Palmolive.”

─ Example 2: “[T]reating the nerve tissue in a mixture of one or more sulfobetaines and Triton X-200”

─ The patent is so specific that it actually lists a specific brand of detergent called Triton X-200.

─ We found a notice from Dow Chemical stating that Triton X-200 was discontinued in 2010 and listing “several

alternative surfactants for TRITON™ X-200 including TRITON GR-5M and DOWFAX™ Anionic Surfactants.”

─ Anyone using one of these alternative detergents automatically avoids infringing the patent.

• Legal feedback we received indicates significant potential FDA problems for AXGN due to the discontinuation of the Triton

X-200 detergent referenced in the patent.

─ A BLA, which the FDA is requiring AXGN to submit upon completion of its clinical trial, requires “in process controls.”

─ “If you use a certain kind of detergent when starting your research, the FDA will require an expensive and complicated

comparison trial with the new detergent you use. You need to do a side by side comparison of Triton X-200 with the new

detergent to make sure the data is compatible. Else you have to start your study from ground zero with a new detergent.”


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Source: AXGN 2017 10K

• Legal feedback we received indicates significant potential FDA problems for AXGN due to the discontinuation of the Triton

X-200 detergent referenced in the patent. (continued)

─ A disclosure in AXGN’s 2017 10K indicates the discontinuation of a chemical with a finite inventory on hand, underscoring the

risk of needing to re-do a trial and the risk of its registry data being rejected as support for the BLA: “…one of the chemicals

AxoGen uses in the processing of Avance® Nerve Graft is no longer manufactured by the original single source

provider. AxoGen has inventory of such chemical which it believes provides more than one year of production.

AxoGen is currently evaluating multiple avenues including new suppliers of the chemical and acceptable substitutes

for the chemical.”


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We review the second claim behind AXGN’s purported intellectual property – that the

company will have 12 years of exclusivity until 2035, assuming its BLA is ever submitted

and approved. A lawyer with extensive FDA experience strongly debunked this notion.


• Claim #2: After its patents expire in 2020, AXGN will have another 12 years of intellectual property protection left,

providing monopoly-like runway until 2035.

─ Axogen fuels this notion: “…In addition we also expect it will receive Biosimilar Protection that could provide an additional 12

years of exclusivity.”

─ When we emailed the company for clarification, they wrote: “From our regulatory team: BLA exclusivity would occur when we

get the Approval from FDA as a Biologic Product. This is when “first licensure” is in effect.”

─ We believe the company is referring to the 12 year exclusivity period from the date of first licensure of the reference product,

during which a biosimilar (ie, a generic, competing cadaver-sourced nerve graft) referencing AXGN’s Avance cannot receive

approval under a 351(k) abbreviated licensure pathway.


• Our skepticism of this claim led us to seek the opinion of a lawyer who is well versed in dealing with the FDA.

─ AXGN launched its Avance nerve graft in 2007, but has failed to finish enrolling a clinical trial or submit a BLA. The company

indicates it intends to submit a BLA by 2021, at which point its product will already have been on the market for 14 years,

and even longer at the point that a BLA is theoretically approved.

─ FDA exclusivity begins at the point of “first licensure” of a product. The date of first licensure is technically when a BLA is

approved. However, AXGN operates under the FDA’s enforcement discretion, under which it is allowed to keep its product on

the market under a transition plan to bridge to BLA submission.

─ The transition plan allows AXGN to operate as though it has FDA approval, albeit under a murky and precarious status. An

additional 12 years of exclusivity – after already being on the market for 14 years or more at the time of potential BLA

approval – would violate the intent of and make a mockery of the law that grants exclusivity.

• We received legal feedback indicating that the FDA does not grant an additional 12 years of exclusivity after a product has

already been on the market this long, and that companies have even sued the FDA to gain exclusivity in this scenario and failed.

─ “In practice, the FDA doesn’t provide exclusivity for 12 years if the product has already been on the market. I have seen this

repeatedly with new drug applications. The FDA provided exclusivity once for an old drug that had already been on the market

and they got hammered. They got such bad press that they won’t do that anymore.” – Lawyer feedback

─ The lawyer indicated that the FDA, especially under the current commissioner, is highly sensitive to providing exclusivity to an

incumbent that has already been on the market and enabling them “to jack up the price” – exactly what wishful AXGN bulls are

hoping for under a 12 year exclusivity scenario.


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• If a biologic is granted 12 years of data exclusivity, a competitor can’t launch a biosimilar (ie, generic version) with the same

labeled indication. However, a copycat can bypass exclusivity and sell an identical cadaver-sourced graft simply by

avoiding any therapeutic claim on the package.

─ “Then it’s not a drug, It’s just a regular medical device, tissue, or blood product. You can sell water in a bottle, but it you label

water as a treatment for dehydration you have to file an NDA because it then becomes a pharmaceutical which requires a

new drug application. If you don’t label it, you can just keep selling water.” – Lawyer feedback

─ “The FDA would be very reluctant to provide data exclusivity for 12 years, and even if they did it would not help

Axogen.” – Lawyer feedback

• By classifying its product as a medical device versus a biologic, a copycat can easily eliminate 12 years of exclusivity,

even if granted to AXGN.

─ As evidence, Integra’s Neuragen and Baxter’s Neurotube, nerve conduit products that are an alternative to AXGN”s cadaver-

sourced graft, are already classified as medical devices.

─ AXGN’s Axoguard line of connectors and wraps is sold under a 510(k) medical device classification. 510(k) is an expedited

approval pathway when a device is substantially equivalent to an existing device.

─ Far from being a competitive advantage that prevents copycats, we believe that the FDA’s determination that AXGN’s Avance

graft is a biologic renders it uniquely vulnerable to copycats that employ an alternative classification.

Lawyers we spoke to provided another reason why AXGN’s claim of 12 years of exclusivity

is far-fetched. They indicated that a copycat can simply change the label or sell their graft as

a medical device versus a biologic, and instantly bypass 12 years of data exclusivity even if

it were ever granted to AXGN. Supporting this notion, the company’s filings indicate that its

Axoguard line of connectors and wraps – an estimated half of its revenue – is a 510(k)

medical device. We note that the FDA aims to reply to 510(k) applications within 90 days and

most applications are approved within 6 months.



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The third claim is that AXGN operates under a transition plan with the FDA which allows it to

sell its products in spite of lacking a trial and BLA approval, and that a new entrant would

not have this luxury and would have to spend “8 years” on trials and BLA’s. Based on his

historical interactions with the FDA, a lawyer indicated that this notion is simply false and

that the FDA does not do “sweetheart deals” favoring one company over another. In other

words, an AXGN copycat can easily acquire the same transition plan under the FDA’s

enforcement discretion and sell an identical product prior to a trial and BLA at any time,

simply because AXGN is already allowed to do so.


• Claim #3: AXGN is uniquely shielded from new entrants today, as it sells its graft under an FDA transition plan, which

no other entrant would receive without completing clinical trials which would take “8 years.”

─ AXGN initially attempted to launch its Avance graft as a Section 361 HCT/P tissue product, which don’t require clinical trials.

However, in 2010 the FDA determined that it was a biologic which requires a P3 clinical trial and BLA.


a trial and BLA, assuming it follows various conditions.

─ Bulls believe that although the FDA allows AXGN to keep its core product on the market prior to having a completed trial and

BLA approval, no other company would get such a deal from the FDA, a notion promoted by AXGN: “We believe a

competitive processed peripheral nerve allograft would need to complete a BLA Phase I, II and III clinical study prior to clinical

release which we believe would take approximately 8 years.”

• The lawyer stated that AXGN’s transition agreement with the FDA is known as a “sweetheart deal,” which the FDA cannot give

to one company and not to another.

─ “I was involved in a lawsuit a few years ago involving grandfathered drugs. The FDA took enforcement action against my client

only. There were two companies selling the exact same product, and the FDA went after one company. The FDA got hammered.

You can’t give a sweetheart deal to a company in Florida like Axogen and not to one in say another state.”

─ “The company that doesn’t get the same deal will sue the FDA and they can say the FDA is biased against us because we’re not

a female-run company, or any number of other arguments of bias. The company that sues the FDA is guaranteed to win in

federal court. The FDA knows this so they don’t give sweetheart deals.”



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The fourth claim is that even if AXGN has no IP protection through patents, no exclusivity

for 12 years, and no ability to prevent a copycat from getting a similar transition agreement

with the FDA, that the company still has “trade secrets” for washing and processing nerves

after they are cut from a cadaver. We find this claim to be nonsensical at face value, as

AXGN’s patent already spells out the exact method used.


• Claim #4: Even if none of the above is true, AXGN possesses trade secrets and know-how in the cleaning and

processing of cadaver-source nerves to make them viable as grafts.

Source: AXGN SEC filings; https://ryortho.com/2009/03/repairing-nerves-with-allograft/; https://www.ncbi.nlm.nih.gov/pubmed/28245670

• Far from being a trade secret, AXGN’s patents specify the exact processing steps in extreme detail, to the point of even stating

a specific brand of detergent from Dow Chemical. Moreover, given the trivial modifications required to avoid infringement of

AXGN’s patent, we believe a copycat could easily hire an ex-Axogen employee to replicate a functionally identical process.

• Historically, Axogen used a third-party “tissue establishment” to “process the peripheral nerve tissue,” suggesting that the

technique is far from proprietary and readily outsourced. From a prior 10K: “AxoGen currently uses LifeNet Health, an FDA

registered tissue establishment to process the peripheral nerve tissue and package the Avance ® Nerve Graft product. LifeNet

processes and engineers many dental, cardiovascular, spinal and orthopedic bio-implants […] Under the agreement, AxoGen pays

LifeNet Health a facility fee and tissue processing service fees for each production run….”

• The technology upon which AXGN’s nerve cleaning process is based is old, dating back to the 1980’s

─ “In 1989, Dr. David Muir, working at the University of Florida, discovered naturally occurring inhibitory structures in peripheral

nerves. He also found the enzyme needed to selectively remove the inhibitory structures […] Between 1990 and 2000, Dr.

Christine Schmidt developed methods of clearing cellular and non-cellular debris from tissue. This is vital for turning donated

nerve tissue into clean, sterile nerve structures that can be used with any patient without fear of infection or tissue rejection.

AxoGen licenses the technologies from the University of Florida and the University of Texas for the production of their AVANCE

Nerve Grafts.”

• Numerous techniques for washing, sterilizing, and decellularizing cadaver nerve tissue for use as grafts have been widely known

for decades. A review of the medical literature yields scores of papers.

─ A 2017 paper titled “Optimizing decellularization techniques to create a new nerve allograft” stated that “The current available

processing protocols have been studied extensively, and a standard processing protocol is available.”

─ Other papers suggest newer techniques, which they state are superior.

https://ryortho.com/2009/03/repairing-nerves-with-allograft/


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• In comments on the most recent earnings call on October 29, 2018, the CEO indicated that enrollment is anticipated to complete

by the end of the year. We note use of the word “anticipate.”

“RECON, our Phase III pivotal study comparing Avance Nerve Graft to synthetic conduits in digital nerve injuries continues to

enroll. We anticipate enrollment to be completed by year-end.”

• However, the company began enrolling patients in the RECON trial in 2015, stating that “active recruitment [is] underway.”

Red flags in clinical trial delays: history of shifting dates for completion

AXGN’s core cadaver nerve product still lacks FDA approval, despite having been

introduced in 2007. In the meantime, the company operates under the FDA’s enforcement

discretion, a high-risk regulatory status under which the FDA can shut down AXGN’s

operations at any time. AXGN is required to seek approval as a biologic product, which

requires completing a clinical trial and submitting a BLA. However, AXGN’s clinical trial is a

moving target that has yet to complete enrollment, after years of trying. In our experience

analyzing trials, delays in patient enrollment are one of the earliest and riskiest warning

signs for investors.

Source: CIQ earnings call transcript; AXGN press release https://ir.axogeninc.com/press-releases/detail/747/axogen-inc-announces-enrollment-of-first-subject-in


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Earnings call, Nov 13, 2014 – implied enrollment to be completed by late 2016“So the BLA trial is we're gearing up for that. As I've mentioned before, the SPA was approved quite some time ago with the FDA.

So the protocol is set and approved by the FDA […] We are looking to begin enrollment of that trial starting right after the

first of the year, sometime in the first quarter, but of course, that's subject to discussions with the FDA as we finalize our

readiness with that […] It's actually a very economical, regulated biologic trial for a lot of reasons, but it'll take us about 3 years to

complete that trial once we begin enrollment. It's a 2-year enrollment period with a 1-year follow-up. And then of course, after

that, there'll be data analysis and actual BLA submission, so there's another year on top of that in terms of data analysis by the

time we're done.” – Karen Zaderej, CEO

Earnings call, Feb 29, 2016 – implied enrollment to be completed by early 2018“In addition during the year, we also started enrollment in the RECON Study, a multi-center prospective randomized controlled

double-blinded study comparing Avance Nerve Graft to manufactured collagen tubes in digital nerve repairs. This is the pivotal

study to support our biologics license application, or BLA” – Karen Zaderej, CEO

“We expect that cost associated with the BLA will continue to increase as more patients are enrolled in the trial over

approximately the next 2 years.” – Gregory Freitag, then AXGN’s CFO, General Counsel, and SVP of Business Development

Earnings call, Feb 28, 2018 – enrollment to be completed in Q4 2018, with BLA submission in late 2020

or early 2021“So RECON, again, is our pivotal trial to support the transition to the biologics license application for Avance Nerve Graft. And that

will complete enrollment this year, but there's still a 1-year follow-up after that. So we'll complete enrollment in Q4. The

follow-up will be completed the following Q4. And by the time we have the data and break that out, it'll be mid-2020. So that's the

significant gating factor to getting then submitting the BLA. So we would be submitting the BLA then in late 2020, early 2021.” –

Karen Zaderej, CEO


Source: Capital IQ earnings call transcripts

In 2014, Axogen’s CEO indicated that the trial would be completed within 3 years of starting

enrollment. Given that the trial began enrollment in mid 2015, the study should have been

completed by the middle of 2018. However, the trial is currently anticipated to complete

enrollment in Q4 2018, with unclear dates for study completion. We note the ever-shifting

timelines provided by the company. We have seen no explanation from the company for why

its pivotal trial keeps getting delayed.


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Source: AXGN 10K filed 2/28/18

Axogen’s filings, in discussing the risks of operating under the FDA’s enforcement

discretion, imply that delays in submitting a BLA under its current transition agreement

could result in its core product being pulled from the market.

The FDA will end the period of enforcement discretion upon a final determination of AxoGen’s future BLA submission or if the

FDA finds that AxoGen does not meet the conditions for the transition plan, or is not exercising due diligence in executing the

transition (e.g., study completion, or BLA submission is neither timely nor adequate). If final action on the BLA is negative

or AxoGen is found to not meet the conditions for the transition plan or its execution, AxoGen will not be able to continue to

distribute the Avance® Nerve Graft. AxoGen continues to work diligently with the FDA and, in this context, continues to

distribute Avance® Nerve Graft.

AxoGen’s Avance® Nerve Graft product is currently allowed to be distributed pursuant to a transition plan with

the FDA and a change in position by the FDA regarding its use of enforcement discretion to permit the sale of

Avance® Nerve Graft would have a material adverse effect on AxoGen.

The FDA considers AxoGen’s Avance® Nerve Graft product to be a biological product, subject to BLA approval

requirements. Although the Avance® Nerve Graft product has not yet been approved by FDA through a BLA, AxoGen’s

Avance® Nerve Graft product is currently distributed under the controls applicable to a HCT/P pursuant to section 361 of the

Public Health Service Act and 21 CFR Part 1271 of FDA’s regulations, subject to FDA’s enforcement discretion and AxoGen’s

compliance with a transition plan established by the FDA [..] In the event that the FDA becomes dissatisfied with

AxoGen’s progress or actions with respect to the transition plan or the FDA changes its position for any reason

regarding its use of enforcement discretion to permit AxoGen to distribute Avance® Nerve Graft product in

accordance with the transition plan, AxoGen would no longer be able to distribute Avance® Nerve Graft, which would

have a material adverse effect on AxoGen’s operations and financial viability.


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Source: https://clinicaltrials.gov/ct2/show/NCT01809002?term=axogen&rank=1

Yet, the ClinicalTrials.gov page for AXGN’s RECON study indicates that it hasn’t been

updated in almost three years. As of the last update in early 2016, the page indicated a

primary study completion date of December 2018. We further note that the trial is small, with

a mere 150 participants, which makes the multi-year enrollment delays that much more

troubling.


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Red flags in clinical trial delays: surgeon feedback on delays (1/2)

In order to understand why the RECON trial appears to be in a state of perpetual

postponement despite requiring a small number of patients, we asked KOL surgeons for

feedback. The reasons provided cast sharp doubt on AXGN’s market opportunity: surgeon

apathy, patient resistance, and a negligible patient population. One surgeon expressed

skepticism that the trial would even enroll this year, which implies even further BLA delays.

• We asked a high volume surgeon and KOL whether the company may be dragging its feet because it’s seeing negative

outcomes in prior registry data that it doesn’t want expressed through a completed study. The surgeon acknowledged the risk as

a possibility.

“150 patients is not a very high powered trial. That should be easy to recruit. If the data is good they should be

rushing to complete the studies [in order to get reimbursement] […] There could be something in the data. In the

early registry data, there was some institutional variability. I have concern that there are some people in the registry where the

outcomes are poorer than at other institutions. But, you can look at autograft outcomes and that should be inferior at those

institutions as well. Allograft not working as universally could definitely be a possibility […] But, when I look at all the

public data, it’s all been positive. There are some small outcome failures, however. You can’t dismiss those. I haven’t

seen any overtly negative studies. However, one big caveat is that I’ve seen a lot of practices where autograft cases

have gone down so much that there’s not enough autograft to do a fair comparison” - Surgeon in eastern half of US

• Just as ominously, various surgeons indicated that the injuries AXGN’s product addresses are so rare that it’s difficult to find even

a small number of patients for the trial, corroborating our research which suggests a miniscule addressable market. We note that

the second surgeon below is an AXGN key opinion leader in one of the largest metro areas in the US, yet he sees only 3-4 digital

nerve injuries per year.

“Why is it taking so long to enroll the RECON study? Many digital nerve injuries are fresh and they don’t have a gap. The

most common digital nerve injury happens in the kitchen when you slice an avocado or bagel. People cut their finger and they

see a doctor within a couple days and it’s repaired acutely. That’s much more common than a delayed case where you need a

graft. The RECON study is digital nerves with a gap. There just aren’t enough digital nerve cases with a gap. I see 3-4

injuries per year that are digital nerve with a gap. […] It’s just the volume of these cases. There’s a 10:1 ratio between

lacerations vs. those with a gap. If you cut a nerve and a tendon, people don’t sit around for 3-4 weeks without seeing a

doctor. That’s when you have a gap and need a graft. What does that say about the market size? Yeah, digital nerves

injuries are a small market.“ - Surgeon in eastern half of US


.


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Red flags in clinical trial delays: surgeon feedback on delays (2/2)

• The small number of addressable injuries was a recurring theme in KOL surgeon feedback.

“Why is RECON trial enrollment slow? The number of people with these types of injuries annually is relatively small.

The volumes for the indications are low. It’s not like heart disease with tens of thousands of patients. It’s not of that

magnitude.” - Surgeon in eastern half of US

• Aside from the infrequence of digital nerve injuries, surgeons pointed to the RECON study’s strict exclusion criteria as making it

difficult to locate participants, leading us to question whether the study is designed to introduce bias by selecting only the

healthiest patients vs. a more representative sample of the patient population.

“The trial criteria are so strict. The patient can’t take medicine or be too old or too young. There are lots of exclusion

criteria. My partners forgot to enroll patients. Patients don’t want to be involved.” - Surgeon in eastern half of US

“’The issue is the rarity of the injury and a lot of exclusion criteria like smoking status, age. These injuries are not

common to begin with […] I don’t know where we stand on enrollment. I wouldn’t be surprised if enrollment takes longer

than the end of the year. The patient has no enthusiasm for the study. Gets them nothing.” - Surgeon in eastern half of

US


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“Most direct reps are fearing for their lives. It’s a fear culture […] Also a culture where dissent is not appreciated as

constructive […] Axogen has huge turnover in the salesforce. Direct reps when they’re successful have large, unilateral quota

increases. 40-50%+ range. When they have success, they get hit with untenable increases.” – Former sales manager

“Every month I was threatened with my job even though I was at 98% of quota. They motivate by fear.”– Former sales rep

”I was one of the top reps […] Find another job or shut up. That’s how it is there. They don’t care about turnover. The

average tenure is probably 1.5 to 2 years. Everybody knows you’re only as good as what you did last quarter. You never know

when you’ll be let go.” – Former sales rep

“The reps have quota increases every year at the annual meeting. “Great job, by the way your comp plan has now changed.” The

comp plan changes every year. Was 5%, then took it down to 3-4% . If it’s at 18% commission, then 15% next year. Went down

3%/year. It’s maybe 13% now. Commissions decrease every year. You have to sell 40% more next year because of the

commission cut. It’s demoralizing to reps. The reps are beaten down every year. It frustrated a lot of people. People left.

The reps get depressed. They’re smashed down as much as the company can. Upper management pay goes up

significantly every year. It’s not good for morale at the company.” – Former sales rep

“The company is pushing close to the line of being unethical. Reps have six months to get a territory up and running. There’s

a lot of turnover.” – Former independent distributor

“They have very aggressive quotas. They make it rough on distributors. The company kind of has a reputation. A quota

increase of 60-70% wasn’t unheard of.” – Former sales manager

“The culture was too rough for me. There was a lot of intimidation.” – Former employee

“Since I started using Axogen 5 or 6 years ago, this is my third rep.” – One of AXGN’s highest volume surgeon customers

Red flags in company culture, accounting, and controls: salesforce instability and turnover

Virtually every former employee we spoke with described a culture of fear within the

salesforce, resulting in what they described as instability in the field, rampant turnover, and

low morale. In our experience with medtech companies, salesforce instability is a key

warning sign before growth turns negative.


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“The culture is 100% focused on the stock. It is 100% of the company’s focus. Churn and burn.” – Former sales rep

“There has been a cultural change from a clinical to a shareholder, stock focused company. They’re focused on driving the

stock and story. It’s a big part of the company culture now. Meeting the street projection has become the dominant talk at the

company […] I think the company is overvalued. The burn rate is out of control. There’s no strategy behind it. Not one profitable

quarter or even trending to it. Huge salaries for the management team.” – Former sales manager

“I left Axogen because of their style. Once they became listed on Nasdaq, they became very street centric, not patient or

employee centric. [T]he mentality is let’s torch this market as fast as possible and get out. They look good but don’t look

good in other regards.” –Former independent distributor


Former employees describe an internal culture of stock promotion, as well as skepticism of

the company generally.


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“I’m sure some channel stuffing went on.” – Former sales rep

“A lot of channel stuffing is happening.” – Former sales rep

“I did a lot of consignment. Property is retained by Axogen but is stored by the facility. Axogen has incentives for direct reps to

convert accounts to owned where hospitals purchase the inventory. The company incentivizes accounts for bulk purchase.

With heavy price increases, the consignment list price is 15-20% more expensive if it’s consigned vs. owned by the facility. Reps

try to convert consignment to purchase inventory. […] This happens mostly in March with the annual price increase.

Axogen has been doing bulk purchase incentives aggressively for 3-4 years.” - Former sales manager

”I used to consign and consign. We switched because consignment was costing a fortune because reps puts tons of inventory at

the facility. The company asked us to convert to purchase, and set a higher price for consignment. They would offer a one time

incentive to buy $50k plus of inventory.” – Former sales rep

“A lot of hardware [nerve grafts] is on loan or consignment. Customers agree to take proper care of it. Axogen supplies x amount of

inventory. It’s pay as you go. Reps are responsible for checking inventory or billing. […] You’d see spikes in revenue when reps sell the inventory.” – Former sales manager


Former sales reps state either indirectly or bluntly that the company has engaged in channel

stuffing. Axogen uses a consignment model where company-owned inventory of nerves is

stored in fridges at medical facilities. The company offers incentives to reps and customers

for one-time, bulk purchases of the inventory on site, creating obvious potential for abuse

ahead of quarters. We note the potential for control issues, as each fridge has to be checked

at regular intervals to determine usage and billing for each period.

Source: Seligman interviews/expert consultations; AXGN 2016 10K, emphasis ours.

.

“The Company did not maintain effective controls over certain non-routine and routine transactions. Specifically, we

identified material weaknesses relating to the design and operation of key controls around the use of judgment and

calculations of significant estimates, as well as quarterly cycle count procedures related to consigned inventories […] In

our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control

criteria, AxoGen, Inc. and Subsidiaries have not maintained effective internal control over financial reporting as of

December 31, 2016….” – “Attestation of the Independent Registered Public Accounting Firm” in AXGN’s 10K for 2016.


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“The only shady thing is the close of months. Axogen extends the close of the month. They count contracts that went

out after the end of the month. Previously end of the month was a relative term [laughing]. Any product delivered for

surgery but not invoiced at the end of the month had a stub period to count it in the previous month. They tried stopping that

[…] I’m not sure how successful that was. It’s usually 7-10 days into the following month.” – Former sales manager

“If I did a case on consignment or shipped for a big case and a train wreck came, and the hospital said ship us seven each of

these sizes, we’d bill for whatever they use and ship the rest back. We had 7 days for purchase orders for procedures into

the last month. A lot of channel stuffing is happening. Every month I had one week to shore up purchase orders from

the previous month. Seven business days. So if its seven days after Labor Day, I would have had until Sep 13th to

clean up August. Always within a day or two, you could sneak a case one way or the other. Just shipping some of

September sales back into August. Or hold the purchase order for September vs. August.” – Former sales rep

Red flags in company culture, accounting, and controls: backdating revenue

More disturbingly, former employees allege revenue recognition practices which we find

questionable, stating that reps can push sales from the first seven business days of a month

into the previous month. If true, we note cases where public companies have faced

legal/regulatory ramifications for improperly backdating revenue.


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Red flags in company culture, accounting, and controls: misrepresenting the total number of accounts

On earnings calls, AXGN provides the number of active accounts as a key metric. Former

employees imply that the number may be highly misleading, with one stating that different

sites at the same hospital system – even within one metro area – are counted as different

“accounts.” In one territory, “30 active accounts” collapsed to three to five hospital systems

– a potential reduction of 10:1 in the actual number of customers. This rep stated that the

compression in AXGN’s stated number of total active accounts could be similar.

• On the last earnings call on Oct 29, 2018, the CEO stated that the company now has 679 active accounts.

“In the third quarter, the number of active accounts increased by 45 to 679, an increase of 21%, up from 563 in Q3 of

2017. This increase in active accounts, along with the increased penetration of active accounts, is the key driver of

our 41% revenue growth in the quarter. Most of our active accounts are still at an early stage of penetration and provide

additional opportunities for growth.” – Karen Zaderej, CEO

• However, a former sales rep in a key metropolitan area indicated a potential 10:1 reduction in the number of actual accounts, as

in his territory “30 active accounts” were comprised by just 3-5 hospital systems. The rep stated that contracts were at the IDN

level, yet the company counted individual sites within the same IDN as separate accounts. (IDN’s are “Integrated Delivery

Networks” – essentially large, multi-facility systems with many hospitals and others points of care).

“I had 30 active accounts that ordered regularly or fairly regularly. 5-10 were sporadic. We didn’t define what was active. An

account is an individual hospital. [A large IDN, name redacted] was 8 hospitals. There were 3-5 IDN’s in my market. All

major. They comprised almost all of my 30 active accounts. […] If I collapsed Axogen’s 5-600 accounts like in my

territory, [the reduction from accounts to IDN’s] would be similar. Even though we have IDN-level agreements, each

hospital was its own decision-maker.” – Former sales rep

• Other former employees pointed to questionable practices around other metrics, particularly around the lack of “same-store”

sales growth.

“Growth wasn’t coming from repeat sales. It came from expansion like picking up another hospital. The company was

spending more than $1 to get $1 of sales. Sales weren’t growing organically […] We wanted to mask it. Most of the growth

was coming from adding new territories and reps.” – Former employee

“After 10,000 patients, the company stopped reporting on these numbers publicly.” – Former employee

Source: Seligman interviews/expert consultations; Capital IQ earnings call transcript

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Valuation and price target

Valuing AXGN and determining a target price is a simple exercise. We believe the company

has only two plausible public comps, RTI Surgical and MiMedx, which trade at more realistic

valuations than AXGN’s lofty 12x revenue multiple. Given the fundamental issues uncovered

by our research, we expect AXGN’s growth to degrade and the stock to revert to a multiple

more appropriate for the high-risk space in which it operates. We arrive at an average target

price of $5.07, a 82% decline from its close of $27.53 on December 17, 2018, and similar to

the levels it traded at as recently as 2016.

Source: Capital IQ, Bloomberg, Seligman estimates and analysis. * MDXG figures use LTM figures as of September 2017, the date of its last 10Q. The company has not filed its 2017 10K

or recent 10Q's. A notification of late filing filed on 11/13/18 indicated that "the Company is assessing revenue recognition for all of the Company’s sales since January 1, 2012."

Key comps ($mm) RTI Surgical (RTIX) MiMedx (MDXG)* Axogen (AXGN)

Stock price $4.01 $1.60 $27.53

Market cap $255 $178 $1,065

Enterprise value $360 $141 $938

LTM revenue $281 $304 $78

LTM EBIT $17 $32 ($17)

LTM Net income ($11) $35 ($20)

LTM growth rate 0.1% 34% 41%

EV/LTM revenue 1.3x 0.5x 12.1x

EV/2019 consensus revenue 1.3x 0.3 8.2x

AXGN valuation RTIX multiple MDXG multiple Average

AXGN LTM revenue $78 $78 $78

Revenue multiple used 1.3 0.5 0.9

Implied AXGN E/V $101.40 $39.00 $70.20

Plus: net cash $126 $126 $126

Implied market cap $227.40 $165.00 $196.20

Shares outstanding 38.7 38.7 38.7

Target price $5.88 $4.26 $5.07


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Valuation and price target

We believe that three other factors justify a deep discount to AXGN’s current multiple.

• First, we estimate that half of AXGN’s revenues come from its Axoguard line of connectors and wraps, a commodity, me-too

product that it doesn’t even own and for which it is merely a third-party distributor. We do not believe investors appreciate this

fact, as AXGN trades at a lofty multiple worthy of an innovative biotech with powerful IP vs. a pedestrian distributor.

• Second, AXGN is a money-losing company with poor economics and no earnings power: -21% LTM EBIT margin, -25%

LTM net income margin, and massively negative operating and free cash flows.

• Third, AXGN has binary risk of losing the ability to market its flagship product, as the FDA can rescind its ability to market

the product at any time, and even if the company submits a BLA, its BLA may be rejected.

• We note several risks to our price target and thesis

─ Axogen continues aggressive price increases to expand its total addressable market and growth rate. We believe this is

unsustainable given increasing pushback from hospitals, but it remains a lever in the meantime.

─ Axogen is acquired. We believe this is unrealistic given AXGN’s valuation, and because the company we believe to be the

only logical acquirer already has competing products and would gain nothing by acquiring AXGN. One surgeon indicated

that he spoke with a public company that was exploring launching a cadaver-sourced allograft product, but that they

believed that the market was too small. We believe this company is the one which is AXGN’s only logical acquirer.

Furthermore, we have heard speculation from experts in the space that this potential acquirer evaluated AXGN many years

ago – when AXGN would have been a fraction of its current valuation – and dropped its evaluation.

─ AXGN finds a few price insensitive, high volume reconstruction surgeons that it engages as consultants or speakers, who

then use its product for breast neurotization. Given the annual revenues that one such physician can drive, and given

AXGN’s small revenue base, AXGN may be able to demonstrate progress toward its 2019 consensus revenue estimate,

which may reinforce enthusiasm among bulls.

─ Although we do not believe this to be the case, our research and analysis may be incorrect in key respects.

Source: Capital IQ, Bloomberg, Seligman estimates and analysis.


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Warnings signs in insider selling

Jamie Grooms co-founded AXGN and was CEO from 2002 to 2010, and Chairman until May

2018. He remains a board member of AXGN. Given his historical and current role at the

company, we find the speed with which he disposed of his stock holdings in AXGN in late

2017 to be a warning sign for investors. He liquidated 98% of his stock ownership over 3

months for proceeds of approximately $9MM, in a manner that we believe to be unusual

relative to Rule 10b5-1 conventions. We interpret a sense of urgency in his selling pattern,

as his trading activity since 2011 had been minimal prior to this sudden liquidation.

Sources: 1https://www.sec.gov/Archives/edgar/data/805928/000117911017015168/xslF345X03/edgar.xml, https://www.sec.gov/Archives/edgar/data/805928/000117911017015344/xslF345X03/edgar.xml;2https://www.sec.gov/Archives/edgar/data/805928/000110465918011770/xslF345X03/a4.xml; 3https://www.sec.gov/Archives/edgar/data/805928/000117911018013429/xslF345X03/edgar.xml; other SEC form 4 filings.

• Grooms’ first plan sold 125,000 of his approximately 365,000 shares in one week in early December 2017, at prices of approximately

$26/share1. Given that AXGN’s stock is still above this price, we believe that the prices he sold at a year ago speak volumes.

• He adopted a second pre-written diversification plan shortly thereafter, which commenced selling in February 2018 and liquidated

approximately 215,000 shares in a span of just eight days2. He sold at prices of approximately $26 to $28/share.

• We find it notable that his sales in early December 2017 occurred quickly following AXGN’s investor and analyst day on November 20,

2017. We characterize the CEO’s commentary during that event as over-the-top bullish, yet Grooms began to sell with what we interpret

as extreme haste following this event.

• We further note recent selling by Gregory Freitag, in which we find several troubling and bearish signs. He serves as General Counsel

and SVP Business Development, was CFO during two prior periods, has been a Board member since 2011, and was CEO/CFO of

Lectec, AXGN’s reverse merger partner.

─ Our analysis of his trading behavior indicates he has historically been bullish, buying shares in the open market a number of times

between 2011 and 2014. In March 2018, he exercised options when the stock was at $40 and kept the shares, also a bullish action

in our opinion.

─ However, his behavior has recently reversed, as he began taking profits approximately one month ago when he sold 20k shares at

$33.25. He opened a 10b5-1 plan on 9/7/18 when the stock was at $41 and modified the plan on 11/9/18 when the stock was at

$36. The modified plan sold another 45k shares on 11/30/18.3

─ Modifying a plan is a red flag, as it can weaken an affirmative defense against allegations of trading on MNPI and create the

perception that the insider was trying to opportunistically step in and out of the market. We emphasize that Freitag is the GC.

─ In other words, a critical executive who was a bull in March 2018 suddenly reversed course this August by setting up a

plan with what appears to us to be a floor near $40, and then not only modified the plan in November, which we think may

have lowered the floor to around $33, but also sold 20K shares outside of the plan a week after modifying it near $32.


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Warning signs in insider selling

A chart of Jamie Grooms stock sales indicates the speed of his liquidation and the prices

near which he sold.

Source: SEC Form 4 filings, Bloomberg

0

50000

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250000

$0

$10

$20

$30

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Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

Co-Founder and Director Jamie Grooms' Monthly Sale Volume

An Overhyped, Cash-Burning Reverse Merger At 12X Revenue

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