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AxoGen (NASDAQ:AXGN)
Q3 2018 Earnings Conference Call
Oct. 29, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the AxoGen third-quarter 2018 results conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kaila Krum, vice president, investor relations and corporate development. Thank you.

You may begin.

Kaila Krum -- Vice President, Investor Relations and Corporate Development

Thank you, Jessie, and good afternoon, everyone. Welcome to AxoGen third-quarter 2018 conference call. We appreciate you joining us. I'm Kaila Krum, vice president of investor relations and corporate development.

With me on the call today are Karen Zaderej, chairman, chief executive officer and president; and Pete Mariani, chief financial officer. The format for today's call will be as follows. First, Karen will discuss highlights from the third quarter, provide a brief company overview and then turn our -- turn to our key operational and strategic objectives. Next, Pete will provide details on the financial results outlined in today's press release and review financial guidance.

We will then open the call for your questions. Today's call is being broadcast live via webcast, which is available on the AxoGen website. Within an hour following the end of the live call, a replay will be made available on the company's website at www.axogeninc.com under Investors. Before we get started, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events.

We encourage you to review the company's past and future filings with the SEC, including without limitation, the company's forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product acquisition and/or development, product potentials, regulatory environment, sales and marketing strategies, capital resources or operating performance. And with that, I'd like to turn the call over to Karen Zaderej. Karen?

Karen Zaderej -- Chairman, Chief Executive Officer and President

Thanks, Kaila, and good afternoon, everyone. Welcome to our 2018 third-quarter conference call. We are pleased to report another quarter of strong growth for AxoGen. Third-quarter revenue grew 41% to $22.7 million.

After investing in significant organization enhancements earlier this year, we are seeing improvements in the productivity of our direct sales team and stabilization of our independent channel. In the third quarter, revenue from our direct sales team was up nearly 50%. This growth and the productivity improvements we saw were consistent with our expectations. Our growth is driven by increasing surgeon acceptance of the body of clinical evidence in support of our product portfolio.

With now more than 1,500 nerve repairs in our RANGER Registry and a growing body of clinical evidence for AxoGen's products in nerve repair, we are creating a differentiated algorithm with demonstrated consistency and meaningful recovery outcomes. We're excited to announce today that the U.S. Food and Drug Administration granted the Regenerative Medicine Advance Therapy or RMAT designation for Avance Nerve Graft. The RMAT designation, under the 21st Century Cures Act, aims to streamline development of regenerative medicine therapies intended for the treatment of serious diseases and life-threatening conditions.

A regenerative medicine therapy is eligible for the designation if it is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product has the potential to address unmet medical needs for such a disease or condition. The RMAT designation highlights both the strength of the data within the RANGER Registry and the significant unmet medical need for improved therapies to treat nerve injuries. AxoGen is focused specifically on the science, development and commercialization of technologies for peripheral nerve regeneration and repair, and we will continue to challenge the norms of historical repair options. We have more than 10 years of experience competing with historical surgical techniques and conduit products.

We have defined the peripheral nerve repair market and established AxoGen as the leader in this field. We are building awareness of advances in peripheral nerve repair and the expanding use of our products with innovator and early adopter surgeons. We are excited to be moving toward the development -- toward developing the middle adopters, who are the majority segment of the nerve repair market. We continue to develop our market through the execution of our strategic initiatives, which we believe, will allow us to build long-term sustainable growth.

We've referred to these strategic initiatives as our five pillars of growth: building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and introducing new products and expanded applications in nerve repair. I'll now comment on our progress of the quarter in each of these areas. First, we continue to build market awareness of AxoGen in our products by engaging with surgeons at hospitals, clinical conferences and promotional events. In the quarter, we participated in the American Society for Surgery of the Hand 73rd Annual Meeting, which is the largest society meeting for hand surgeons.

At the meeting, AxoGen hosted an educational symposium with more than 150 attendees, which focused on the rapidly growing body of clinical evidence in support of our nerve repair algorithm. During the symposium, one of our RANGER investigators, Dr. Fraser Leversedge, presented an update on more than 400 upper extremity nerve repairs from the RANGER Registry, highlighting 85% meaningful recovery in these repairs. This is the largest review of our registry to date.

The data shows consistency over time, with a substantial and expanding outcomes population and continues to support meaningful recovery and a variety of gap lengths and in sensory and motor function. We work year round to increase awareness of peripheral nerve damage and options for repair by featuring stories of patients whose quality of life was improved through nerve repair using one or more of our products. One of these patients is Tara. Tara had a family history of breast cancer, losing her mother, grandmother and three maternal aunts to breast cancer.

At the age of 28, she tested positive for the breast cancer susceptibility gene BRCA2. Tara chose to have prophylactic double mastectomy with implants, and she lost all sensation in her breasts. She lived with the implants for 10 years, and by her own account, didn't feel normal and wasn't engaging in the world as much as she had before her mastectomy. When one of her implants ruptured, she met with a reconstructive plastic surgeon who recommended removal of the implants and an autologous flap reconstruction with neurotization.

Tara's reconstruction was performed by a surgeon trained in the ReSensation technique. As a result of the surgery, Tara has sensation in her breasts and tells us she is now fully engaged in an active lifestyle. October is Breast Cancer Awareness month. On October 17, we supported and participated in several breast reconstruction awareness or BRA Day.

These events help raise awareness of breast reconstruction options, including ReSensation. We also participated in the American Cancer Society, making strides against breast cancer event in New Orleans, where there were over 3,000 women in attendance. In total, we participated in 11 patient-focused events across the country, where we had many meaningful interactions with patients just like Tara and those actively researching their options. We're excited to provide another option for these women who are seeking a more complete solution.

Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted four national education events in the third quarter and expect to conduct a total of 18 during 2018. These surgeon-led programs focus on advances and best practices in nerve repair. They allow surgeons to gain additional confidence in nerve repair techniques and they drive adoption and increased utilization of our products.

On average, we see the utilization from surgeon attendees more than double, six months after they attend the program. Included in our events for the quarter was an upper extremity fellows program, where we trained the next generation of nerve repair surgeons. We plan to conduct a total of five fellows programs in 2018, training more than two-thirds of all hand and microsurgery fellows for the year. The growing surgeon excitement around the concept of nerve repair during OMF procedures was increasingly evident during the recent American Association of Oral and Maxillofacial Surgeons Conference.

We noticed a significant increase in booth traffic and awareness relative to prior years. The scientific meeting included seven presentations and breakout sessions on peripheral nerve repair, including one focused on iatrogenic injuries and the need for both early identification and referrals for surgical evaluation. We also hosted our second educational program in OMF surgery in September, with a focus on nerve repair during mandible reconstruction. This educational program was fully enrolled, and we found that surgeons are excited to now be able to add nerve repair into their standard surgical approach and provide an opportunity for sensory function for these patients.

Historically, many of these injuries went untreated, leaving the patient with significant quality-of-life challenges associated with permanent numbness of the lip, mouth and chin. Surgeons now have an option to reconstruct these nerves, giving patients the opportunity to see return of function. We are pleased to see the eagerness and high-level of engagement by the participants to add nerve repair to their reconstructions. Our third pillar is to grow the body of clinical evidence.

Our library of peer-reviewed clinical publications now numbers 65. The volume of presentations and publications reinforces both the importance of peripheral nerve repair and the growing body of evidence for AxoGen's products. Our RANGER Registry has enrolled more than 1,500 Avance Nerve Graft repairs and continues to provide significant new evidence in the management of nerve injuries. As mentioned, data was recently presented on more than 400 upper extremity nerve repairs from the RANGER Registry at the American Society for Surgery of the Hand.

This data continues to support meaningful recovery in a variety of gap lengths and in sensory and motor function. The RANGER data consistently demonstrates that Avance outcomes exceed those associated with synthetic conduits and are similar to nerve autograft without the associated donor-site morbidities. Surgeons are using this data to better understand nerve repair outcomes and to expand their treatment algorithms. 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. These studies continue to produce important data that assist in clinical decision-making and support the adoption of our platform for nerve repair. In addition to the clinical evidence we continue to build with hand and reconstructive plastic surgeons, we have also grown our experience in oral and maxillofacial surgery. As these surgeons become confident with AxoGen's portfolio, we see expanded use of multiunit repairs of iatrogenic nerve injuries and the application of our products to more complex injuries, such as mandible reconstructions due to benign tumor resection.

Clinical data show that repair of these injuries with the AxoGen portfolio of products can provide meaningful recovery in 87% to 94% of these patients. Late last year, we announced the launch of our expanded application in breast reconstruction neurotization. At AxoGen, we believe the ideal breast reconstruction restores size, shape, symmetry, softness and now sensation, without the potential risk in comorbidity associated with autograft nerve harvest. We have developed the ReSensation surgical technique, which incorporates this vision into a reproducible and efficient solution for reconstructive plastic surgeons.

We began surgeon training on the ReSensation technique for breast reconstructive neurotization as part of the application launch. We plan to partner with 20 to 25 breast neurotization centers by the end of 2018, and we're pleased to announce that we've now completed initial training at all centers and will continue to develop these centers over the next year. We are now enrolling patients in the sensation neurotization outcomes for women or Sensation-NOW clinical registry. Sensation-NOW will study the physical and quality of life outcomes of breast neurotization.

We believe the data from this registry will demonstrate that ReSensation technique provides meaningful recovery of sensation and quality of life outcomes for women who choose autologous reconstruction, following a mastectomy. Our fourth pillar is sales execution. As I mentioned, we made several organizational enhancements in recent quarters to expand and enhance our commercial team. We ended the quarter with 76 direct sales representatives, an increase of four in the quarter and 23 in the last year.

With our growing sales team, we continue to see that more than 50% of our current reps have been with the company for less than one year. We will continue to invest in our sales team and expect to exceed 80 direct sales reps by the end of 2018. In addition to our direct sales force in the U.S., we currently have 20 independent sales agencies supporting the execution of our commercialization strategy. During Q3, we saw a stability in the performance of this channel following the changes we implemented.

Our sales agencies will continue to represent an important aspect of our growth in select territories. We will continue to make broad commercial investments across our sales channel as we continue to grow and expand our platform for peripheral nerve repair. 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. The growing number and penetration of active accounts is driven by increased adoption of our nerve repair products across the surgeons treatment algorithms, accounts ordering Avance Nerve Graft, AxoGuard Nerve Connector and AxoGuard Nerve Protector generate greater than six times the revenue of an account ordering just one of the products. Our objective is to continue expanding the treatment algorithms of surgeons to include all four of our surgical implants across their full continuum of nerve repair. Our fifth pillar of growth is the introduction of new products and expanded applications in nerve repair.

There are many unmet needs in the surgical repair of peripheral nerves, and we, as the leading company in this space, are positioned to develop new solutions for these needs. We are making investments and opportunities to innovate both our current portfolio as well as introduce new solutions for patients with peripheral nerve damage. Although existing products in the upper extremity, trauma, oral and maxillofacial and breast reconstruction markets are our prime revenue sources today, expanded applications in lower extremity surgery, head and neck surgery, urology and the surgical management of pain offer AxoGen expanded revenue opportunities in the future. Millions of people suffer with recurrent and chronic pain.

The surgical management of pain may provide an effective nonpharmacologic resolution for many causes of this pain. The pain universe is large and the potential to apply surgical nerve repair and nerve management techniques to address issues such as pain associated with total joint replacement, hernia repair, neuropathy or migraine headaches, creates a significant opportunity for us to introduce new products and expanded applications for our product portfolio. We have made good progress in identifying the potential market needs around these opportunities and expect to talk more about our initiatives and market-development work in this area at our 2018 Analyst Day in November. Before I turn the call over to Pete, I want to highlight again that Q3 was a strong quarter for AxoGen.

Our performance reflects growing surgeon acceptance of Avance Nerve Graft, a biologically active nerve therapy with more than 10 years of clinical evidence. We are pleased with the RMAT designation, which recognizes the strength of the existing clinical evidence and acknowledges the significant unmet needs for effective nerve repair solution. We expect sales representative productivity and penetration of active accounts will continue to grow. We continue to execute against our strategic initiatives and are driving strong revenue growth, while maintaining gross margins above 80%.

We continue our focus on nerve repair education and awareness, experiencing successful interactions at professional society meetings and at educational programs for surgeons. Surgeons are demonstrating an increasing awareness and adoption of the AxoGen portfolio in our core applications and are applying our portfolio of surgical solutions in new areas. We are making investments to grow expansion markets in OMF and breast reconstruction neurotization, and we're exploring the surgical management of pain. We're pleased with our progress and with our opportunity to continue developing the emerging nerve repair market and driving long-term sustainable growth for AxoGen.

Now I'll turn the call over to Pete. Pete?

Pete Mariani -- Chief Financial Officer

Thanks, Karen. Good afternoon, everyone. Third-quarter revenue grew 41% to $22.7 million. Revenue growth was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix.

As Karen noted, most of our revenue growth was driven by increases in both the number and penetration in active accounts. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to develop their treatment algorithms. Gross profit for the third quarter was $19.2 million, a 42% increase compared to Q3 of '17. Gross margin was 84.7% for Q3 compared to 84.4% in the prior year.

Total operating expenses in the third quarter was $24 million, up 60% over the prior year. The increase includes additional investments in our expanded commercial capabilities as well as increased investments in clinical, R&D and general corporate expenses associated with our growth. Operating expenses also include noncash stock compensation expense of $2.2 million in Q3 compared to $919,000 in the prior year. Excluding the impact of noncash stock comp, total operating expenses for the third quarter increased 53% to $21.8 million or 96.3% of revenue compared to $14.1 million or 88% of revenue in the prior year.

Sales and marketing expense in the third quarter was $14.7 million, up 55% over the prior year. As a percent of revenue, sales and marketing expense in the quarter was 64.7% compared to 59.4% in the prior year. As we mentioned, we continue to invest in our commercial capabilities. These investments in our organizational infrastructure will provide a solid framework to drive continued execution of our growth plans and expand our platform for nerve repair.

Research and development spending in the third quarter was $3.3 million compared to $1.8 million in the prior year. R&D costs include product development and expenditures for our Biologics License Application for our Avance Nerve Graft, development of the new AxoGen Processing Center, support of the RANGER Registry as well as studies for the development of new products and applications. As a percent of revenue, R&D expense for Q3 was 14.6% compared to 11.2% in the prior year. We continue to build out our R&D capabilities and are increasing investments in important clinical study work in product development.

We expect that investment in these activities, paired with the development cost related to our new processing facility will drive R&D spend to be higher than historical levels. General, administrative expenses in the third quarter was $6.1 million, up 61% over the prior year. The increase includes higher compensation expenses, including higher noncash stock compensation expense of $1.2 million compared to $695,000 in the prior year, related to supporting our organizational growth. As a percentage of revenue, G&A expense in Q3 was 26.8% compared to 23.8% in the prior year.

Net loss in the third quarter was $4.1 million or $0.11 per share compared to $2.1 million or $0.06 per share in the prior year. Excluding the impact of noncash stock compensation, adjusted net loss and net loss per share in Q3 was $1.9 million and $0.05 per share compared to $1.2 million and $0.04 per share in the prior year. Adjusted EBITDA loss in the quarter, which excludes the impact of noncash stock comp, was $2.4 million compared to an adjusted EBITDA loss of $433,000 in the prior year. On our balance sheet, we ended September with $126.4 million in cash, cash equivalents and investments compared to $133.6 million at the end of Q2.

Cash burn in the quarter included $4.9 million to complete the purchase of our new processing center in Ohio. Turning to guidance. We are reiterating our 2018 full-year guidance. We expect 2018 revenue will grow at least 40% over 2017 revenues, and gross margins will continue to be above 80%.

We also anticipate having at least 80 direct sales reps by year end. Additionally, we are introducing guidance for 2019. We expect 2019 revenue will grow at least 35% over 2018 revenues and gross margins will continue to be above 80%. And as Karen mentioned, we're pleased with our commercial, clinical and strategic progress in Q3.

We're seeing improved productivity of our sales team, increased penetration of our active accounts, and our gross margins continue to be above 80%. We have accelerated investments in our commercial capability, which we believe will allow us to continue to drive execution in our core trauma and nerve protection markets, while also bringing additional resources and focus to our expansion opportunities in OMF and breast reconstruction neurotization. These investments are having an impact, and we believe we are well-positioned to continue to drive growth and expand our platform for nerve repair. In addition to our commercial capability, we are building the facility infrastructure to support our long-term growth.

In late September, we disclosed expansion plans for our corporate office. These plans include the opening of a second corporate campus in Tampa and extending the lease of our current Alachua headquarters facility to at least mid-2021. We also announced today that we have secured a temporary office facility in Tampa, while the second corporate campus is being constructed. We will continue to invest in the infrastructure of our business and strategic initiatives to drive growth in a manner that demonstrates the efficiency of our business model.

And with that, I'd like to turn the call back over to Karen.

Karen Zaderej -- Chairman, Chief Executive Officer and President

Thanks, Pete. Before we close, I'd like to remind everyone that we'll be conducting our Third Annual Analyst and Investor Day in New York City on November 19. In closing, our efforts to execute against our strategic initiatives focused on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plans and expanding new products and applications in nerve repair. We have positioned AxoGen to lead and grow the peripheral nerve repair market.

We are building awareness, developing additional clinical data and expanding use of our products with innovator and early adopter surgeons and are excited to be moving toward developing the much larger middle adopter segment of the peripheral nerve repair market. We're pleased to see expanded use of the AxoGen product portfolio in our core trauma market, growing surgeon acceptance of our OMF application and early response to our market development efforts in breast neurotization. We are building a world-class commercial team that will continue to scale and enable us to drive growth in current and expanded applications, where we believe we can bring meaningful solutions to current clinical challenges. We will continue to expand our platform and develop new nerve repair applications, challenging the norms of historical repair options and positioning our algorithm as a new standard of care in the peripheral nerve repair market, a market that currently represents more than $2.2 billion in existing applications, and we expect, will continue to grow.

Before taking questions, I do want to welcome our new investors and thank the AxoGen team for their commitment to our mission and to our values. At this time, I'd like to open the line for questions. Jessie?

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question is coming from the line of Richard Newitter with Leerink Partners. Please proceed with your question.

Richard Newitter -- Leerink Partners LLC -- Analyst

Hi. Thanks for taking the questions. I wanted to start off with the guidance, which you reiterated for 2018 and then also the preliminary guidance you've given for '19. Just on 2018, you're reiterating your 40% guide and you delivered 41% in the third quarter, with that implying a little bit of acceleration into the fourth quarter.

So first, I was just hoping, Karen, maybe you could tell us what gives you confidence that you're going to see acceleration in growth into the fourth quarter? And then I'll ask about '19.

Karen Zaderej -- Chairman, Chief Executive Officer and President

Thanks, Rich. So as we look at this, we've looked at the productivity improvements that we've seen in our sales team as well as certainly, the reps who are coming into their what I would consider their productivity cycle. As you remember, in fourth quarter of last year and the first quarter of this year, we added a number of reps and it takes eight to nine months before a rep is really productive. And so we started to see some of that impact in Q4 -- excuse me, in Q3, and we'll see continued impact of those reps as they hit their productivity phase in Q4.

And so as we look at the performance of what we already see happening and what we've seen happened in the past, we feel confident in what will -- the results that we'll yield in Q4.

Richard Newitter -- Leerink Partners LLC -- Analyst

OK, I just want to be clear. Can you maybe -- what are the assumptions to get to that acceleration? Do you need to see or are you expecting an improvement even off that 50% direct sales force growth into the 4Q? Or do you see something better than stabilization in the independent channel, maybe some rebound in that channel to get there? What's underlying the assumption there?

Karen Zaderej -- Chairman, Chief Executive Officer and President

Well, I think, you bring out several good points. So for us, it is looking at our overall productivity, but, in particular, looking at the productivity enhancements of our new reps, who really just get into their stride again in that ninth month. So that -- our assumption is that they'll continue to do what we've seen them do in the past or what others have done before them and so that's the base of our assumption on the direct team. On the independent channel, and again, we get about 80% of our revenue from our direct reps but the other 20% comes from our independent channel.

In our independent channel, we've seen a good stabilization. We're not assuming significant growth coming from the independent channel, but we are assuming that we'll continue to see the stabilization that we've put in place and saw through Q3.

Richard Newitter -- Leerink Partners LLC -- Analyst

OK, that's helpful. And then just for 2019, you're establishing at least 35% growth for -- year over year for revenue. I guess, just as we think about that number, I'd love to hear how you came up with it. What are some of the puts and the takes we should be thinking about? And I don't want to pass, you've talked about running the business to a 40% to 50% kind of growth business.

If you can just maybe reconcile how that 35% fits into kind of the way you've historically run the business, that would be helpful. And if it's potentially just to embed some conservatism for the x factor, which clearly came into play in 2018, if that's kind of the discrepancy between that, I don't know, internal objective and your guidance, or if there's anything else there to think about? Thank you.

Karen Zaderej -- Chairman, Chief Executive Officer and President

Yeah, we've been thoughtful in selecting what will be our guidance for next year and thinking about how you would want to model our business going forward. We still fundamentally believe that the market in peripheral nerve repair is very strong, and that we're just scratching the surface of what is a large growth opportunity. We know from the work that we've done with surgeons in the past and what we see continuing, is that surgeons in this market convert their nerve repair solutions slowly in a very deliberate way as they see results in their own hands as they make changes. And we believe we're uniquely positioned in this market to really capitalize on those factors with a very differentiated product portfolio, the substantial amount of clinical evidence that we've built to date and a pipeline of surgeons who are in that trial process.

And we've looked to all of those things as we think about the future and combine that with the productivity of our expanding sales team to lay out what we think is a very thoughtful model that shows continued growth for the long term. So it is with quite a bit of thought at looking at what we've learned over the last many years in the peripheral nerve repair market that we've put together the guidance and think that will be a good guidance for you in setting your model.

Richard Newitter -- Leerink Partners LLC -- Analyst

OK, thanks.

Operator

Thank you. The next question is coming from the line of Raj Denhoy with Jefferies. Please proceed with your question.

Raj Denhoy -- Jefferies -- Analyst

Hi. Good afternoon. Maybe I could just expand a little bit or ask a few kind of clarifications to Rich's questions. But in terms of the direct channel, right, so I think what we've seen this year is quite a bit of a sort of churn and change in your direct channel in the first part of the year.

Now it appears to be relatively stable and you're seeing increased productivity. So there, if you can give us in terms of whether that's in fact, the case? Are you still seeing some level of turnover in that sales force? Or do you view it as relatively stable at this point and really what we should see is just increasing productivity for the next several quarters?

Karen Zaderej -- Chairman, Chief Executive Officer and President

Yeah, if I go back to first quarter, what we saw in first quarter wasn't what I would consider turnover as much as reorganization. We grew our sales teams substantially and at the beginning of the year decided that we needed to expand the way they were structured and create more regions and some more sales leadership. And so with that, we ended up making a number of changes in positions that people had, including promoting some people from within, which is what is the turnover that you're talking about. We actually have very low regrettable losses.

So we haven't seen that historically, we still don't see that. But we have had, because of growth, some of those problems where you're trying to figure out how do you create the infrastructure for the long term, and we made the choice in the first quarter to go ahead and create that infrastructure for the long term. That caused a little bit of a disruption in the first quarter. You saw some of that disruption in the first quarter, but has stabilized and is not been an ongoing issue and we've continued to add reps throughout the year who are on each of their own growth curves, of course, but we've been able to continue to support that without added disruption as we both split territories and grow the overall business.

Raj Denhoy -- Jefferies -- Analyst

So did you think though that -- again, that period of disruption, I didn't imply this was on a term, but that disruption is sort of behind us. Are you expecting another sort of disruptive period or can we really expect just to see sort of productivity? And of course, you'll keep adding around the edges on the sales force, but how should we think about the trajectory at this point of that sales force?

Karen Zaderej -- Chairman, Chief Executive Officer and President

Yes, I -- we will continue to evolve the sales team. We are still growing. We want to continue to add more sales associates. As we've said, it will exit this year with at least 80 associates.

So we'll grow again in fourth quarter and beyond, but we see that more of an -- as evolutionary change rather than the dramatic shift that we had in the earlier part of this year.

Raj Denhoy -- Jefferies -- Analyst

OK. And then on the distributor piece, because last quarter obviously, there was, again, some issues with a couple of the distributors. So it sounds like that has largely been rectified although it's relatively kind of flattish growth. I mean, do you expect we'll see a resumption in growth out of the channel? Or there's still a couple of them that are underperforming? It also looks like you added another distributor in the quarter.

So really just any comments around that would be helpful.

Karen Zaderej -- Chairman, Chief Executive Officer and President

Sure. Well, again, I think, a hybrid channel makes a lot of sense for us for the long term and it's an important part of our overall strategy. As we talked about before, the trauma market by definition is geographically diffused. It's spread out across The United States.

You're always going in a helicopter ride at a Level I Trauma Center. And that means that there are some very high value accounts that are a long distance from a driving standpoint from our direct reps and that doesn't necessarily make sense. And so what we want to do is make sure that we have good coverage across The United States, with focused territories for our direct teams and local independent channels for those more remote trauma centers, and there are quite, honestly, a lot of them. So that is the work where you'll see us go up and down some as we try and make sure that we have good coverage for those trauma centers for the long term, while at the same time making sure that our direct territories are designed to be as efficient as possible.

So we will continue to see that we will have an independent channel to make sure that we provide that coverage. Now in terms of the stabilization, yes, absolutely, we made some changes in Q2. Now we didn't make them fast enough to not affect Q2. But we saw that stabilize actually at the end of Q2 and certainly through Q3.

From a growth standpoint, I think, we are taking a somewhat conservative approach in thinking about the growth of that channel. But it certainly has the opportunity to continue to grow. Traditionally independents have not grown the same on average, the same as a direct rep, yet we have had some independent agencies that have. So certainly our best independent agencies look just like a direct territory, but the -- on average, have been lower in growth and we try to be conservative in our assumptions there.

Raj Denhoy -- Jefferies -- Analyst

Great. And sorry, just one last one. So just in terms of the guidance for next year, as well. So the 35% or the at least 35%.

I guess, trying to square that in light of the fact that you, as you noted, you've now trained your number of breast centers, postsurgical pain is poised to, per DAP, start to contribute. You're still seeing productivity increase in this direct channel. How do we square all that with the fact that you're guiding to 35%? I mean, should we view that as perhaps a starting point for you? Or how should we really be thinking about that in the light of everything else going on in the business?

Karen Zaderej -- Chairman, Chief Executive Officer and President

Well, again, we've looked at this in a lot of different ways and still believe that we have a long-term sustainable growth opportunity in the overall market. And in looking how that might fluctuate from quarter to quarter, we feel that we've been thoughtful in assuming that we can give you guidance for a 2019 number that would be at least 35%, but you're absolutely right. We have a foundation in our core trauma market that we believe is still at early stages not with depths of penetration. We layer on top of that the OMF market, which has -- actually getting some good traction with certainly the early adopters and excitement, especially, in the mandible reconstruction segment and our emerging opportunity in breast neurotization.

And we think all of those will contribute to a solid opportunity for overall growth in 2019 and certainly beyond that. The surgical management of pain is still in its very early stages. I would not assume that, that will have substantial growth in 2019. Like all of the markets that we've talked about, peripheral nerve repair is slow, but we see that as a substantial long-term driver for our business and see that as another growth area.

Raj Denhoy -- Jefferies -- Analyst

Great. Thank you very much.

Operator

Thank you. [Operator instructions] Our next question is coming from the line of Craig Bijou with Cantor Fitzgerald. Please proceed with your question.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Good afternoon. Thanks for taking the question. Wanted to start with the penetration of the active accounts that you guys talked about and how that's driving a good portion of your strength. So I think, Karen, you mentioned the middle adopters and I know that's been a focus getting into that next level of adoption.

So just maybe if you can expand upon some of your comments. What you're seeing from middle adopter perspective? Have you really gotten into that level? Are you seeing more surgeons at these active accounts, maybe a second surgeon start using the products? And I guess, maybe any other color that you're seeing coming out of these active accounts.

Karen Zaderej -- Chairman, Chief Executive Officer and President

Yeah, thanks, and that is our goal. Obviously, if you want to become the standard of care, you need to move into the middle adopters. And the majority of our business 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 into that middle adopter group. However, in local markets, I think, we are starting to see some middle adopters with at least interest in the products. We notice at things like the American Society for Surgery of the Hand, the ASSH Meeting that was just recently held, in the information sessions that are there, the educational sessions that are there, the types of questions that are being asked start to be more like middle adopter questions than what you would typically see from an early adopter. Early adopters are really trying to understand the science, they're trying to understand the innovation.

Middle adopters are looking at a change to try and understand how it affects them and their practice. We've talked before that they like things to be, if you look at the change model, easy, normal and rewarding. And we're starting to see those types of questions in the sessions, rather than the more scienty-based questions. 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.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Good. Thanks. That's helpful. And maybe a follow-up -- another follow-up on 2019 guidance.

So just want to get your thoughts on how you guys have thought about some of the recent competitive announcements and how you've thought about that factoring into 2019. And then maybe, I don't believe you said it, I apologize if I missed it, but sales rep hire expectations for 2019.

Karen Zaderej -- Chairman, Chief Executive Officer and President

Well, first, on the sales rep hire, we'll talk more about that at the Analyst and Investor Day in November. We will continue to grow, but we'll talk a little bit more about it in about a month. In terms of the competitive questions, let me backup just a little bit. We've always competed with Synovis, Stryker and Integra, that's not new for us.

They've been in the market, in fact, much longer than we have with the synthetic tubes that each of them market. And so competing with these other companies is not a new phenomenon for us. I think, you have to step back and think about then what is the product that you have that you're competing with. And the fundamental things that are important in nerve regeneration are both having structure and actually the right kind of structure to help guide the nerve fibers in the cells across the gap as well as having guidance for bioactivities that allows the nerve fibers to understand the direction that they should follow.

A nerve fiber when it sprouts out of the end of the nerve can equally go forward or backwards and they're fine to go in either direction. And so you need to have some sort of guidance that gives them the directionality to tell the nerve fiber to get to the other end. Everything we're doing is about providing enough signal capacity to generate the either sensation or the motor function that is again normal for that patient. And so we feel confident that we still have a unique position in the marketplace with, in particular, in this case, Avance Nerve Graft with both the natural structure that is what the -- the normal structure that the nerve fibers are looking for in terms of round tubes of a particular diameter that is what the nerve fibers prefer and the guidance of our active laminin.

And I think, this is all recognized with what we saw in the -- and that's why we wanted to point out the RMAT designation. The RMAT designation is for regenerative medicine products that, first of all, address a significant unmet need, which we feel nerve repair is one, but also demonstrates that they have preliminary clinical evidence that indicates that the product has the potential to address that need. And with the designation of Avance Nerve Graft as in the RMAT designation, we feel that we've got a good position to continue to compete in this space and really make a difference in this important segment of healthcare in changing peripheral nerve repair.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Very helpful. Thanks for taking the question.

Operator

Thank you. It appears we have no further questions at this time. So I'd like to pass the floor back over to management for any additional or concluding comments.

Karen Zaderej -- Chairman, Chief Executive Officer and President

Oh thank you, Jessie. And I want to thank everyone for joining us on today's call. And we look forward to talking with many of you at our upcoming Analyst and Investor Day in November. Thank you.

Operator

[Operator signoff]

Duration: 48 minutes

Call Participants:

Kaila Krum -- Vice President, Investor Relations and Corporate Development

Karen Zaderej -- Chairman, Chief Executive Officer and President

Pete Mariani -- Chief Financial Officer

Richard Newitter -- Leerink Partners LLC -- Analyst

Raj Denhoy -- Jefferies -- Analyst

Craig Bijou -- Cantor Fitzgerald -- Analyst

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