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AxoGen Inc (NASDAQ:AXGN)
Q4 2019 Earnings Call
Feb 24, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the AxoGen Fourth Quarter and Full-Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I will now turn the conference over to our host, Pete Mariani, Chief Financial Officer. Thank you, you may begin.

Peter J. Mariani -- Chief Financial Officer

Thank you, Diego, and good afternoon, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer and President. Karen will begin our call with an overview of our operational highlights for the quarter, and then I will provide a detailed analysis of our fourth quarter and full-year financial performance later in the call. Today's call is being broadcast live via webcast, which is available on the Investors section of the Axogen website. Within an hour, following the end of the live call, a replay will be available in the Investors section at www.axogeninc.com.

Before I get -- before I 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 potential, the regulatory environment, sales and marketing strategies, capital resources or operating performance.

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

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Thanks, Pete, and good afternoon, everyone.

We delivered solid revenue growth in both the fourth quarter and the full year. Total revenue in the fourth quarter grew 20.2% to $28.1 million, driven by the strength in our core trauma business. For the full year, revenue grew 27.1% to $106.7 million. At AxoGen, our mission is to restore nerve function and quality of life to patients with peripheral nerve injuries. We're advancing this mission through the pursuit of our five pillars of growth, which are building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, sales execution, and introducing new products and expanded applications in nerve repair.

Turning first to sales execution. As we discussed on last quarter's earnings call, we have rebalanced and refocused our commercial efforts toward extremity trauma, our largest market opportunity and most efficient path to sustainable long-term growth. Specifically, we've increased our sales representatives focused on growing deeper within our current surgeon customers to support achievement of optimal clinical outcomes for all the nerve injury patients. This deeper use is anchored by our flagship Avance Nerve Graft, and supported by the expanded use of our full nerve repair algorithm. We believe this increased sales rep focus will result in deeper penetration and improved development of active accounts. We're pleased with our progress executing this refocused approach, while also recognizing that new market development requires persistence at both the account and surgeon level.

Developing surgeon should consistently use our nerve repair portfolio, requires us to raise awareness of the clinical data to support the use of our products, and to provide peer-to-peer education programs and interactions that teach and endorse optimal nerve repair algorithms and techniques. We work closely with each surgeon, as they build their own nerve repair experience and positive patient outcomes to support their continued use of our technology.

Our sales representatives are highly involved, supporting each surgeons journey to become a consistent, long-term user of AxoGen's product and nerve repair algorithm. We're confident that we have the right strategy and team in place to continue driving surgeon adoption over the next several years. As we focus on extremity trauma, we do continue to invest in and grow the breast reconstruction neurotization and oral and maxillofacial markets. But are doing so with an improved balance of commercial resources as these nascent markets continue to develop. To increase our market penetration, we continue to build our sales footprint, and ended the quarter with a 109 direct sales representatives, and 19 independent sales agencies.

As we discussed throughout 2019, by thoughtfully splitting sales territories and strategically converting agency territories to direct reps, we are gaining improved account coverage, which allows our sales reps to spend more time developing surgeons and accounts within tighter geographies. As a result, approximately 90% of our fourth quarter revenue came through the direct sales channel versus 85% a year ago. It is important to note that our agency channel will continue to be in a central part of our strategy, as these agencies are able to more efficiently and effectively cover target accounts in geographically remote location.

In the fourth quarter, we increased our number of active accounts to 797, up 12% from 712 at the end of 2018. We continue to observe year-over-year increases in revenue per active account, and expect this trend to continue as we focus on increasing surgeon adoption in these and other targeted accounts. We also expect that our focus on surgeons and accounts in extremity trauma will lead to further development of our pipeline of developing accounts, leading to continued increases in active accounts over the course of the year and beyond.

For the quarter, the top 10% of our active accounts continue to represent approximately 35% of our revenue, suggesting that there is a significant runway for growth within our current account base. In other words, increasing our penetration of our existing accounts represents a significant growth opportunity, as more accounts move toward utilization -- toward the utilization rate of our top 10%. Additionally, revenue from our top 10% of accounts continues to come primarily from a small number of early adopter surgeons within each account, which provides additional growth opportunities even in our strongest accounts.

We're encouraged by the early results of our commercial improvements, and we remain firmly focused on execution, as our sales force matures and our commercial organization continues to develop throughout 2020. Our leadership team will continue to review and analyze our commercial strategy and allocate resources to those areas that provide the greatest long-term growth. I'm pleased with the progress we've made on sales execution, and I'm confident we'll continue to see these efforts pay off throughout the year.

Turning to our pillar of building market awareness, our platform for nerve repair was well-represented at the recent combined 2020 meetings of the American Association for Hand Surgery, American Society for Peripheral Nerve, and the American Society for Reconstructive Microsurgery. AxoGen hosted an educational symposium that explored peripheral nerve repair advancements made in the last decade, as well as AxoGen's role in supporting improved procedures and techniques that are on the horizon. In addition to our symposium, there were several clinical and scientific presentations throughout the meetings that highlighted AxoGen's full product portfolio, including data from the AxoGen-sponsored RANGER registry.

I'd also like to take a moment to highlight the new 2020 CMS reimbursement rates for nerve repair in the outpatient setting that went into effect on January 1. With these new rules, CMS has effectively unbundled direct repair from gap repair significantly lowering the reimbursement for direct repairs and increasing the reimbursement for repairs requiring an implant to bridge the injured nerve gap. Specifically, reimbursement of direct repairs was reduced by approximately 60% in both hospital outpatient and ambulatory surgery centers. While reimbursement for procedures using Avance increased 21% at hospital outpatient centers, and 78% in the ambulatory surgery centers reimbursement rates for procedures involving conduits and connectors also increased 21% in hospital outpatient centers, and 20% in ambulatory surgery centers.

While Medicare patients represent a relatively small percentage of trauma cases, we're encouraged by the new CMS direction as it reflects the evolution of nerve repair adoption. Commercial payers often follow the lead of CMS, which we believe bodes well for future reimbursement for nerve repair and could lead to increased procedure volume of short gap nerve repairs and ambulatory surgery centers.

Our efforts to educate surgeons and develop advocates continued in the fourth quarter, and we conducted a total of 26 national education programs in 2019, including six Fellows program. These surgeon-led events focus on advances and best practices in nerve repair with participating surgeons gaining additional confidence and nerve repair techniques. We trained three quarters of our hand and microsurgery fellows in 2019, and expect to train three quarters in incoming fellows in 2020, as we remain committed to educating the next-generation of surgeons.

The structure and format of our educational programs will continue to evolve in 2020. We plan to shift resources more toward targeted regional and advanced education program to complement our core national education program. Increasing surgeon adoption of our product portfolio continues to be supported by a large and expanding body of clinical data. In January, we announced that our RANGER registry has achieved a significant milestone, enrolling more than 2,000 Avance Nerve Graft repairs. The ongoing registry study allows for the evaluation of nerve injury and repair techniques, and outcomes in sensory, mixed and motor nerves across short and long gap repairs, and has supported several peer-reviewed clinical publications and surgeon presentations at scientific meetings.

For example, at the September meeting of the American Society for Surgery of the Hand, data was presented from 511 upper extremity nerve repairs, with an average follow-up of 14 months, demonstrating a consistent meaningful recovery rate of 84% for Avance Nerve Graft with no graft-related adverse events. Finding from the MATCH cohort of the major study show Avance Nerve Graft has statistically significant improvement as compared to synthetic conduits in three essential areas; the rate of recovery, the overall degree of recovery, and the average recovery of static 2-point discrimination, a key sensory measure in the hand.

The study found that in digital nerve gaps less than or equal to 14 millimeter, Avance demonstrated a meaningful recovery rate of 92% as compared to 67% for conduits. In gaps between 15 millimeter and 25 millimeter, Avance demonstrated a meaningful recovery rate of 85%, while conduits were found to be 45%. These outcomes are consistent with previously published literature for synthetic conduits and Avance, the MATCH arm of RANGER serves as a contemporary cohort control, providing conduit and autograft data from participating centers. Surgeons are using this clinical data to better understand nerve repair outcomes, and to expand their treatment algorithm.

Our RECON study continues to enroll, and we recently updated our expectation to reach the target enrollment of a total of 220 subjects to the end of second quarter. We anticipate the data report-out for RECON will occur in Q3 of 2022. Our Sensation-NOW clinical registry continues to enroll. Sensation-NOW studies for sensory and quality of life outcomes of breast neurotization after reconstruction using the ReSensation surgical technique. We completed the pilot phase of REPOSE Study, and are currently enrolling in the comparative phase. REPOSE is a prospective, randomized controlled study, evaluating the use of Axoguard Nerve Cap in the management of painful neuroma as compared to a standard neurectomy procedure.

We are making significant advancements in both the depth and breadth of clinical studies, and we'll continue to invest in new studies that provide surgeons with confidence in advanced nerve repair techniques with the AxoGen portfolio. One example, is our newly initiated recent pain registry study, evaluating the surgical treatment of pain. This study is designed to capture the patient's pain journey, beginning at the onset of chronic pain following patients through the referral networks, including the prior therapies attempted and then onto the surgeon that performs nerve repair, using AxoGen technology. Following the surgery, the study will ultimately collect data on patient outcomes. This study recently initiated its first center, and we believe once complete, it will provide meaningful data to aid in the clinical management of patients with chronic nerve pain. The first module of this study will target approximately 200 subjects across up to 10 centers.

We had previously discussed several foundational initiatives to introduce new products and expand the application of our portfolio into the surgical treatment of pain. We believe symptomatic neuromas are a common source of chronic pain, following traumatic injuries orthopedic surgeries. Surgeons can surgically remove the neuroma and repair the resulting nerve injury using our products. We see significant interest among surgeons in treating this underserved patient population. In 2019, we initiated market development efforts with the limited number of our current hand and plastic surgeon customers to increase the identification and referral of symptomatic neuroma patients for their evaluation and measurement. This month, we initiated an expansion of these efforts, including the launch of Axoguard Nerve Cap, an important addition to our solutions portfolio to address neuromas. Axoguard Nerve Cap is designed to separate the nerve and from the surrounding environment to protected from mechanical stimulation and reduce painful neuroma formation.

Before I hand the call over to Pete, I want to reiterate how pleased I am with the progress we've made, as we continue to execute against our strategic initiatives in this large and developing market. 2019 was a year of significant change in our commercial organization. And we believe the steps we've taken will support long-term sustainable growth for AxoGen. We will continue to invest in our commercial organization to drive further -- to drive future revenue growth, but will do so at a measured pace in order to allow our current sales -- field sales capability to continue to mature and develop.

Now, I'll turn the call over to Pete for a review of financial highlights. Pete?

Peter J. Mariani -- Chief Financial Officer

Thanks, Karen. Fourth quarter revenue grew 20.2% to $28.1 million, while full-year revenue grew 27.1% to $106.7 million. Revenue growth for the quarter and the year was primarily the result of increases in unit volume, as well as the net impact of price increases and changes in product mix. Our revenue growth was largely driven by increased revenue in active accounts, as well as the addition of new active accounts. We have 797 active accounts, which represents an increase of 12% over the prior year. We also continue to see growth in our pipeline of new accounts, as surgeons become more familiar with our products and begin to incorporate them into their treatment algorithms.

Gross profit for the fourth quarter was $23.3 million, a 17.7% increase compared to Q4 2018. Gross margin was 82.7% for Q4, compared to 84.5% in the prior year fourth quarter. Gross margins in the quarter were negatively impacted by increased processing costs, as well as approximately $280,000 or 100 basis points from additional inventory reserves required in the quarter, which are not expected to repeat in future quarters.

Total operating expense in the quarter was $30.7 million, up 19.7% compared to the prior year. The increase includes 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 non-cash stock compensation expense of $2.9 million in the fourth quarter, compared to $1.6 million in the prior year. Our spending growth has continued to moderate over the past three quarters, and is now in line with our revenue growth.

Sales and marketing expense in the fourth quarter was $18.8 million, an increase of 21.6% over the prior year. The increased spending includes the expansion of our sales footprint and continued investment in surgeon education programs. As a percent of revenue, sales and marketing expense increased slightly in the quarter to 66.8% compared to 66% in the prior year.

Research and development spending in the fourth quarter was $4.9 million, an increase of 29.1% compared to $3.8 million in the prior year. Our increased investment in R&D included additional clinical and product development programs, as well as expenditures supporting our BLA for Avance Nerve Graft. As a percentage of revenue, R&D increased to 17.4% in the fourth quarter, compared to 16.2% of revenue in the prior year's fourth quarter.

General and administrative expenses in the fourth quarter was $7 million, an increase of 9.6% compared to $6.4 million in the prior year. The increase includes higher compensation expenses, including higher non-cash stock compensation, related to supporting our organizational growth. As a percentage of revenue, G&A expense in Q4 decreased to 24.8% compared to 27.2% in the prior year fourth quarter.

Net loss in the fourth quarter was $7 million or $0.18 per share, compared to $5.2 million or $0.13 per share in the prior year. Excluding the impact of non-cash stock compensation, as well as litigation and related charges, adjusted net loss and net loss per share in Q4 of 2019 was $4 million and $0.10 per share, compared to $3.6 million and $0.09 per share in the prior year.

Adjusted EBITDA loss in the quarter, which also excludes the impact of stock compensation, litigation and related charges was $4.2 million, compared to an adjusted EBITDA loss of $4 million in the prior year quarter.

Turning to our balance sheet. The balance of cash, cash equivalents and investments at the end of the year was $102.5 million, compared to $106.1 million at the end of the third quarter.

Now turning to guidance. We are reiterating our 2020 guidance. We expect that revenue will be between $124 million and $128 million and expect that the number of direct sales representatives will increase to be between 126 to 131. Additionally, we expect the gross margins will remain above 80%, and then we will see moderate year-over-year improvement in operating margins.

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

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Thanks, Pete. AxoGen remains the leading company, solely dedicated to improving quality of life for patients suffering from peripheral nerve damage. We believe that we are building a foundation based in science and clinical outcomes that will allow us to address these important unmet clinical challenges. We are confident that the underlying fundamentals driving our business are strong, and we believe that the continued execution of our strategic initiatives will deliver long-term sustainable growth.

I want to thank our investors for their ongoing support and the AxoGen team for their commitment to our values and mission to revolutionize the science of nerve repair.

Before taking questions, I'd like to end our prepared remarks with a story about how a surgeon using the AxoGen algorithm, help his patient, David, recover from a terrible nerve injury. David suffered a gunshot wound to his upper right leg, when he and his wife unknowingly interrupted a home invasion. David's immediate wound was treated in the ER, and he was sent home to recuperate. However, the gunshot has severed David's sciatic nerve, which impacted his ability to walk and left him with debilitating pain. He described the pain as constant lightning bolt in his leg. He was unable to sit, stand or walk comfortably. He struggled with everyday activities, and was unable to return to work. He consulted several specialists, and fortunately, one referred him to a neurosurgeon for evaluation. The surgeon was able to surgically remove significant scar tissue, that have become wrapped around the injured nerve, and cut out a large painful neuroma that has developed, which resolved the pain. The resulting nerve gap was then repaired with Avance Nerve Graft and Axoguard Nerve Protector. Following the surgery, David was immediately pain-free and able -- and began working to rehabilitate his leg. He continues to regain sensation and motor function to his injured leg. He recently returned to work driving a forklift, and he's back to rough housing with his grandchildren. AxoGen is grateful for the role, we were able to play partnering with the surgeon on Avance Nerve Repair technique that provided David with the possibility of recovery following such a terrible trauma.

At this point, I'd like to open up the line for questions. Diego?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will conduct our question-and-answer session. [Operator Instructions]

Our first question comes from Raj Denhoy with Jefferies. Please state your question.

Raj Denhoy -- Jefferies -- Analyst

Hi, good afternoon. Maybe I could just start with the cadence of the sales rep hires. In the last couple of years, you've almost doubled the sales force, and the expectation is to grow, again, here by about 20 reps or so in 2020. And I guess the question is really around where you see it ultimately heading? Will there be a period of time at which you think the sales force is at the right size or where the additional reps or the addition of reps maybe slows a little bit?

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Well, I think we are slowing the rate of addition of reps starting this year. And I think that the size, the ultimate sales team will depend on as we scale and improve the productivity of the reps with the size of the territory that they can maintain growth, and continue to build their business. So as we've talked about before, at this point, we see about a $2 million threshold where we need to split a territory to maintain the growth of the territory. We are exploring other selling models that may allow us to offload some of the more service components of a territory to allow that number to reach a higher threshold, but it's too early for me to tell you that I think that that's doable. So at this point, I would say we continue to see that we will add reps, as we need to split territories over time. It will be at a more reduced rates, because we've done some of the strategic foundational things that we needed to do in 2019 that caused us to accelerate some of the rep hires like splitting and entering some key geographic territories, as well as converting some of the independent agencies. So those pieces are complete.

Raj Denhoy -- Jefferies -- Analyst

Okay. When we -- you put a finer point on it. So I think one of the things it becomes difficult to parse out from the numbers when you're adding sales reps is that the piece that you are, is to see any change in the productivity of the sales reps, depending on how you calculate the average number of reps. The productivity has been relatively flat. Again, I imagine, its being masked by the sheer number of new sales reps coming in. But as you look now into 2020, do you expect that we'll start to see that rep productivity start to shine through a bit such that it can be appreciated by investors?

Karen Zaderej -- Chairman, Chief Executive Officer, and President

So what we've assumed in our guidance in 2020 is relatively flat productivity and not jumping ahead of that. I think, again, we're piloting some things that I -- that would have the potential to improve that. But until we see it, we're not baking it in. So at this point, the assumption is relatively flat productivity per rep. Longer term, yes, I do think that that's very possible both with the maturing of our sales team, as well as some of these productivity measures.

Raj Denhoy -- Jefferies -- Analyst

Okay. And maybe just one last one, just on the mix of revenue. Is there anything you can give us in terms of Avance versus the other products, the AxoGuard family of products, where you're seeing most of the growth at this point? Or is it relatively well balanced?

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Its relatively well balanced. Avance remains a little over half of our revenue. That's been very consistent over the years. So we see growth across from -- across the board. But, again, Avance is a significant contributor with over half the revenue and growth.

Raj Denhoy -- Jefferies -- Analyst

Okay, great. Thank you.

Peter J. Mariani -- Chief Financial Officer

Thanks, Raj.

Operator

Thank you. Our next question comes from Richard Newitter with SV8 Leerink. Please state your question.

Richard Newitter -- SV8 Leerink -- Analyst

Hi, thanks for taking the questions. Maybe just one on guidance, and then two follow-ups. The -- I appreciate that the guidance reflects an attempt or you're refocusing a little bit more heavily on your core trauma and some of the sales, the -- some sales force realignment that have been in the works here to do that and optimize the selling organization. I'm just curious, though, could you talk about what contribution, if any, is contemplated from some of the newer areas that you're penetrating are looking to go into in nerve and dressed? And I understand that OMF maybe is a little bit deemphasized, but what contribution if any is considered from those new areas?

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Yeah, we don;t break out each of the segments. I think both breast and OMF have a small -- a relatively small base, but have a good opportunity for continued growth. And we've seen continued growth from both of those segments, when we look at their overall year-over-year performance. So we anticipate that both of those will continue to have growth. I'd be a little more cautious in pain. I think it was a very early stages of pain. And just like all parts of nerve repair, the long-term conversion process just takes time to build. And so I would put that as a negligible impact this year, with more of an eye toward the outer years of seeing that start to take hold.

Richard Newitter -- SV8 Leerink -- Analyst

Got it. And Karen, just as you kind of look at, then reevaluate the things that are happening in your markets versus the things that you feel like need to be reshuffled internally and you had new sales leadership, which maybe gave you a fresh look or an opportunity to take a fresh look at some things, and that may be facilitated some of these changes. But I'm just curious at what point or what gives you confidence that nothing necessarily structurally is changing in your end markets ultimately or the market opportunity? And what can you kind of say to give us confidence that as you reevaluate that that you're confident that it's all about the things that you're doing and under your control and just the way that you're accessing this market? Thanks.

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Yeah, we have -- we obviously look very closely at the potential and opportunity we see at the account and at the territory level for all of our reps, and one piece that we've added into the disclosure. So, we've put here -- that we started reporting last couple of quarters, is that 10% of our revenue, excuse me, 10% of our active accounts deliver 35% of our revenue. And those are good accounts, but they're not unique. They're not -- that's roughly 80 accounts, it's not the -- there's nothing unique about those 80 accounts that we can't duplicate it more sensors. And so what we do is see that there is significant potential to expand our existing active accounts of like sizes to be like that 10% what we've already developed that penetration.

In addition, in the top -- that top 10%, we still see continued growth. And when you look at them, it's a small number of surgeons, usually early adopter surgeons, even in those best accounts. So we have room to expand those even further and keep raising the bar of what that top level performer is. So that's why we look at it and say, we're still at the early stages here. We don't see things that give us concern that that there is a market limitation. It really is that we need to continue to be able to execute and move through the conversion process stay focused in trauma, not get distracted with some of these other exciting areas like breast neurotization and OMF, but stay focused in the trauma to put the hard work and effort into really getting these surgeons to convert what they're doing. And we believe that's the best approach to continue to realize the value out of these accounts.

Richard Newitter -- SV8 Leerink -- Analyst

Got it. One more, just -- is there a price increase assumed in your outlook for 2020? And how much? Thanks.

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Yeah. Yes. We take a price increase or have taken a price historically in the first quarter. We are doing that again. This year, we've assumed, however, that the price increase will be low-single digits, just with anticipating that as we get into larger and larger accounts, that there'll be more price pressure for some discounting. And so we have assumed a low-single-digit price increase.

Richard Newitter -- SV8 Leerink -- Analyst

Thank you.

Operator

Thank you. Our next question comes from David Turkaly with JMP Securities. Please state your question.

Dan Stauder -- JMP Securities -- Analyst

Hi, this is actually Dan on for Dave, thanks for taking the questions. So just first off, -- hey, how was going? -- so first off, you mentioned operating margin should see some improvement in 2020. So we were just wondering if you could give us any color on where you expect to see this benefit on the P&L? And how much of an impact this can make to the net income line? Thanks.

Peter J. Mariani -- Chief Financial Officer

Well, I think I don't quantify it, but I'll certainly indicate that we're going to continue to make investments across the organization. But we've been moderating that spending growth. You will see leverage in G&A certainly, and sales and marketing across the year. Well, you've seen us continue to grow the R&D line. The R&D as a percentage of revenue is higher than it was a year ago. It's going to continue to be at this higher rate because we've got some additional clinical work that we've -- that we are initiating and we'll continue to do an additional work in product development. But -- so you will see the leverage across sales and marketing and G&A. And we're not quantifying that, but you'll certainly see improvements in operating margin across the year.

Dan Stauder -- JMP Securities -- Analyst

Okay, great. That's helpful. And then just a follow-up. Touching back on the splitting of territories, long-term this should drive productivity improvements. But, could you just give us an idea of the amount of time it takes to transition a region through a split, as well as how long it takes to see productivity ramp back up in these areas? Thanks for the questions.

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Yeah. When we talk about bringing in a new rep, we still see that we assume 9 months to 12 months before they really started get effective and start to see that ramping. So the rep who has been with us for a while, and it's keeping a portion of the territory, there'll be a short-term disruption as they split things, and we work their work patterns. But the real impact is on the new person coming in and picking up the second half and it will be about 12 months disruption in that split -- portion of the territory.

Dan Stauder -- JMP Securities -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Ryan Zimmerman with BTIG. Please state your question.

Sam Brodovsky -- BTIG -- Analyst

Hi, thanks. This is Sam on for Ryan. Just to start out with, I know it's early, but first quarter with updated CMS reimbursement for nerve repair, can you kind of characterize any change in usage patterns you're seeing based on this?

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Yeah, it's still too early to see anything. Remember, Medicare is a very small amount of traumatic injuries, traumatic -- trauma happens to be a young persons injury, more often than it is anybody who's in the Medicare ranks. So we don't see a tremendous impact at this point. It's more around the commercial payers start to adjust and follow the structure that we think we'll see a bigger impact.

Sam Brodovsky -- BTIG -- Analyst

Okay. And then on the gross margin lines, year-over-year decline there. How should we think about this going into FY '20 and can that contribute to that operating margin expansion? Or should we expect to see pressure there?

Peter J. Mariani -- Chief Financial Officer

Yeah. No, we said in my -- our prepared remarks, we do have some increased processing cost. As we get larger, we've got additional costs in our current production facility. And in addition to that we had a one-time event in the quarter, where we ended up having to take some additional reserves on inventory primarily on some pre-process donor tissue inventory. Not a significant issue, but it was obviously it's notable in the quarter, but that's not something we would expect to go into the future. But we do see, and have seen some increase in costs in the organization as we continue to build out the organization and prepare for growth.

Sam Brodovsky -- BTIG -- Analyst

Great, thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from Kyle Rose with Canaccord Genuity. Please state your question.

Kyle Rose -- Canaccord Genuity -- Analyst

Great. Thank you very much for taking the question. So I just wanted to follow up just a little bit on some of the commentary around the 10% of accounts or the 80 accounts that represent the 35% of revenues. Just maybe if you could give us some historical context there as far as how long it takes some of those accounts to get to some of those high-performing levels? And then also maybe your success at driving accounts toward those levels. Was it -- last year, it was 60 accounts that were driving that same type of revenue mix and you're able to drive 20 accounts higher, I guess. I was trying to understand, truly what's happening on an account basis to make somebody contribute that much relative to some of the other accounts, the other 700 accounts that you're hoping to walk up that type of productivity curve as well.

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Yeah, this measure of -- we noticed that this measure of the top 10% of our accounts yielding 35% of our revenue has been in place for a number of quarters. So that's not something that just popped in fourth quarter pretty much through last year, and into the year before we saw the same sorts of trends, which does mean that we've added additional high-value accounts, and these accounts have continued to grow. In terms of how long they take, I would say it varies. It is interesting and obviously we look at that, because we would like to see more accounts grow quickly like we've seen with some of the accounts in that top 10%. It really looks at the speed at which a surgeon can go through their treatment algorithm and expand their usage to become a confident champion of AxoGen products. And so -- so for us, it's around continuing to go back and getting them to add in that next step in the algorithm. And so the work for the rep is to make sure that they keep going back and identifying gaps in their usage, and have them try that, follow their results and add that into their treatment. So for example, most surgeons will start with digital nerve injuries. We want to get the outcomes from those digital nerve injuries. But then continue to work our way up they are with more and more complex injuries, and that's the work that the rep does. So we want to make sure that the rep is doing that as rapidly as possible and the surgeon hopefully engages to pull in patients to do that as quickly as possible. It's still not months, again, nerves heal slowly. So this pipeline is generally years, but you can go faster than in some cases than others with that constant push with the rep toward the surgeon to move through the algorithm.

Kyle Rose -- Canaccord Genuity -- Analyst

Great. That is -- that's very helpful. And then, I just wanted to circle back on one of the previous questions regarding sales force productivity and just kind of what's assumed with respect to the guidance this year? Maybe just also you provide a little color on -- you've made some significant increases in the sales force over the course of the last two years. Help us understand what's gone right in those productivity ramps of those cohorts, the last 12 months and 24 months? And maybe how that's informed the hiring when you think about 2020? Whether it's the different training programs or the different types of reps you're trying to target? How has that changed, how has the last 24 months changed, how you think about the rep hiring and the productivity?

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Yeah. I think we've done some very good things to give the new reps that we're hiring a solid foundation in nerve repair. And so we've increased our -- both our clinical training as well as our sales direction on how to sell in nerve repair. We're very technical sell, but we still need to be able to approach surgeons and understand what their issues are, and help them to solve their issues. That's really what our job is, and working with the surgeons. And I think we've really improved our sales training to approach it as a partner to the surgeon in trying to solve their patient issues. I think we've also done a very nice job of clarifying and standardizing what we're looking for in new people that we're hiring to make sure that we are consistent in the type of talent that we're recruiting. And I think that shown in the sales associates that we continue to bring in. Even in this more competitive job market, we have not seen challenges in hiring people. And we've been able to hire to the profile that we've identified that we think create somebody, who wants to really make change happen and focus on changing their territory. And so I think we've got a profile of a rep that works, so that they can meet that need.

Kyle Rose -- Canaccord Genuity -- Analyst

Great. Thank you for taking the questions.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn it back to management for closing remarks. Thank you.

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Thank you, Diego. I want to thank everyone for joining us on today's call, and we look forward to seeing many of you at Investor Conferences in the weeks ahead. We'll be in attendance at the SVB Leerink Global Healthcare Conference in New York City later this week, followed by the Barclays Global Healthcare Conference in Miami on March 10, and the BTIG Medical Technology Conference in Snowbird, Utah on March 19. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Peter J. Mariani -- Chief Financial Officer

Karen Zaderej -- Chairman, Chief Executive Officer, and President

Raj Denhoy -- Jefferies -- Analyst

Richard Newitter -- SV8 Leerink -- Analyst

Dan Stauder -- JMP Securities -- Analyst

Sam Brodovsky -- BTIG -- Analyst

Kyle Rose -- Canaccord Genuity -- Analyst

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