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MiMedx Group Inc. (NASDAQ:MDXG)

Impact of CMS Policy and Ongoing FDA Discussions Conference Call

December 05, 2013 10:30 AM ET

Executives

Thornton Kuntz – Vice President-Human Resources and Administration

Parker H. Petit – Chairman and Chief Executive Officer

William C. Taylor – President and Chief Operating Officer

Michael J. Senken – Chief Financial Officer

Analysts

Matt G. Hewitt – Craig-Hallum Capital Group LLC

Bruce D. Jackson – Lake Street Capital Markets LLC

Suraj A. Kalia – Northland Securities, Inc.

Operator

Good day, ladies and gentlemen and welcome to the conference call to discuss Impact of CMS Policy and Ongoing FDA Discussions. My name is Lisa and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I’d now like to turn the presentation over to Mr. Thornton Kuntz, Vice President of Administration. Please proceed.

Thornton Kuntz

Thank you, Lisa and good morning everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to risks and uncertainties.

Actual results may differ materially from those set forth in contemplated by, or underlying the forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission including our Form 10-K for the year-ended December 31, 2012 and our most recent 10-Q.

We do not undertake to update or revise any forward-looking statement, except as may be required by the company’s disclosure obligations in filings it makes with the Securities and Exchange Commission under Federal Securities laws.

With that, I’ll turn the call over to Pete Petit, Chairman and CEO.

Parker H. Petit

Thank you, Thorn, good morning. Thanks for joining us for this update. I have with me this morning Bill Taylor, our President and Chief Operating Officer; and Mike Senken, our Chief Financial Officer. There are certain other executives in the room.

First I’d like to say that our press release on the new CMS pricing program and substitutes and the day our FDA transition plan are all good news. In the case of CMS, we totally support their proposal to make these pricing changes and we believe it will be very beneficial on Medicare patients and most importantly save significant Medicaid dollar, particularly those caused by wastage.

During the 90 day period until we received the Untitled Letters, we have met and had conversations with numerous FDA staff. It took some time, but the FDA did eventually explain to us their concerns with our micronized products. Specifically the FDA explained that [c]ryo-milling cut dehydrated Amnion/Chorion Membrane results in a micron size powder and the loss of the tensile strength in the last 60 that are essential characteristics of the original Amnion/Chorion tissue, relating to its utility to function as a quote physical membrane i.e. covering a barrier.

For this reason, they actually believe that the micronized products are more than minimally manipulated and the products therefore are not eligible for marketing solely under Section 361 of the Public Health Services Act. I thank those very quote around our press release.

Now, we do not agree with this position. We believe that the FDAs reasoning is incorrect and we still believe that our micronized products on all published FDA regulations and precedence’s. However we have nevertheless agreed to pursues the BLA process for our micronized products because we believe in the long run, this is a good thing for us as well as the industry.

We also believe the FDA has seen the policy shift in regards to micronization from what was the previous president and I will talk a little bit about that in these next two points.

I was in attendance to the meeting of American Association of Tissue Banks on Tuesday and Wednesday of this week. As an industry association we met with numerous members of the FDA staff to discuss the various issues of the importance to tissues processes and the regulation of human tissue. I think it’s a consensus of AATB that there is now new policy evolving and AATB will need to be involved with AMC as the process unfolds.

Therefore I will be using the BLA pathway for our micronized products as a very good way toward policy in many instances. While we disagree with this specifics of why they believe our micronized is outside of 361 ways, we agreed totally to-date, you should closely monitor and regulate the introduction of this new technology to the market.

I believe we are a responsible in our corporation to always do the right thing from a safety and efficacy standpoint with our products initiatives. However that is not always the case with other organizations and frankly we have seen some of our smaller other states competitors in the market with product and make ridiculous claims without any scientific basis. Clinical trials are published via these papers, so we will take this extra burden with BLA process in order to be serving at the micronized amniotic membrane tissue allografts and in the market in a more orderly and regulated fashion. It’s as simple as that.

And the BLA process where our micronized will be a significant committed advantage for MiMedx. We have the scientific and medical staff to conduct the complex process associated with the BLA. We have proposed during the summer to visit with the FDA staff to begin this process on some of our new product initiatives in the cardiology and dermatology areas. We were praying to make those visits when we receive the Untitled Letter, so we knew BLAs were in our future.

Our small competitors are not going to have the experience staff to conduct studies of this nature. Also, in many cases they are violating our patents and we will start patent litigation issues in the very near future onto most of those situation and that’s a story to be told on another day.

I know some of you may be thinking as to why we would embrace the BLA process where our micronized product versus having it operated on 361. First, I believe we are responsible enough to corporate always do the right thing from a safety and efficacy standpoint with our product initiatives. However, again that’s not always the case in some of these other organization. So it’s as simple as that. That’s the reason we are taking this initiative.

Now let me explain the process we will enter to bring some additional clarity to the points. Based on certain precedence with other corporations and advice from FDA consultants we have proposed the FDA that we will pursue the Investigational New Drug, IND and Biologics License Application, BLA process for our micronized allografts.

In addition we will enter into negotiations with the agency to transition the micronized products to license biological products and continue to market the micronized on a specific condition as to be approved by the FDA. These activities have begun and it will take several months to reach final conclusions. We know from our discussions that there will be no guarantee that the FDA will agree to any particular transition plan.

However the Company things that the safety record associated with the micronized product as well as out of our sheet allografts is exceptional. We’ve had no reported adverse reactions with 20,000 of the micronized product shipped and over 180,000 of the sheet allografts shipped. In addition, we have a published peer view scientific paper on the micronized product. Therefore we’re hoping that we can reach an agreement with certain specific relative to a transition plan.

In this process we’ve now met with numerous members of the FDA staff. We now know our regulators. This is always a good business practice. Our regulators did not know us except for a corporate name, website and press releases. We now have reached a point where as we enter the process we can have informational exchanges that will be enlightening and productive in laying out our corporate product development strategy.

Now the question is, is going to come up, is this. Where we have liked to have had this Untitled Letter experienced not take place certainly. However, your corporate executive dealt with this in a professional fashion while improving our future opportunities. The FDA staff has their responsibilities and we have our responsibilities. Generally speaking they certainly should always reliant. I think the step for us entering the BLA process with our micronized product is going to be prepare us for a self tuned [ph] BLAs which we will accomplish as we enter some new and other exciting opportunities that will exit in the cardiology and dermatology areas.

So in general, I can say in the last three months have been an excellent rapid maturing process in the regulatory area for the Company. In fact the last six months has matured us very rapidly and tells our presence in Washington D.C. It started in June with the experience we had with the Veterans Administration.

We won that battle and the process got a number of executives at the Veterans Administration. Then came the CNS pricing initiative. In that process we met with a – gotten a number of CMS officials who had the responsibilities in our specific areas, give the substitutes. As you understand from the outcome we brought our previous healthcare informatics expertise there representing the CMS quality data on the effects on certain against substitute products we are having in terms of the wastage factors.

And now with the FDA, we will have an current ongoing involvement in their regulatory processes. So the last six months has been dramatically in terms of having our presence at Washington. This was an essay process, which I wish to take a place a little more earlier fashion, it’s happened executives again as to manage the process quite effectively.

Now we are going to discuss with you some of the specifics asked back to the new CMS payment system. These systems was the right thing for all Medicare patients and the American tax payer. It’s a real win for MiMedx because we’ve always been focused on cost effective as well as clinically selected solutions for allografts. We were positioned properly as we entered the market and the market rapidly accepted our cost effective solutions. Our competitors had miss-positioned their product cost wise for many years and chose not to make any changes, they are not claiming this payment change will force medical intervention.

Actually it’s towards medical waste which is an important responsibly for all of us. Bill Taylor is going to give you some exclusive detail now why the CMS payment system change would be extremely beneficial for us, Taylor.

William C. Taylor

Thanks Pete. One point I want to highlight on FDA before moving to CMS is that I just want to remind everybody that reasons the FDA finally articulated for the Untitled Letter are clearly related only to the micronized tissue in our non-applicable to our sheet membranes, I just want to highlight that before you just to remind it.

And relative to CMS, we previously announced our support from the centers for Medicare, Medicaid services CMS new methodology for the reimbursement of skin substitutes in the hospital outpatient setting which was released on November 27. Today, I will further explain details of the new payment policy and it’s impact on EpiFix reimbursement in 2014 and beyond.

When the new hospital Outpatient Perspective Payment System, OPPS, draft rule was purposed in July. MiMedx immediately supported the initiative and that is a clear effort by CMS to address excess cost and wastage in the skin substitute category. In that initial proposal CMS proposed to packaged reimbursement for certain products using advanced wound care with the related surgical procedure into a single tier payment system with a package grade of $874, which would include the facilities fees and payment for the skin substitute.

In our last shareholder call, we indicated that we felt EpiFix will gain substantial market share on this new proposed CMS payment setting. Coupling EpiFix’s strong clinical effectiveness along with its range of size appropriate grafts starting at 1.5 square centimeters and the fact that 77% of diabetic foot ulcers and 56% of venous leg ulcers are 5 square centimeters or less as was recently reported in the published paper. We felt that 2014 would be a very strong growth year for EpiFix. We projected the changes implemented in the final rule may have even greater positive impact than we originally expected with the proposal.

So let me explain, first of all, in the final rule CMS is dividing the skin substitutes into two groups for packaging purposes instead of the single category that was originally proposed; high cost skin substitutes and low cost skin substitutes. Skin substitutes within ASP average sales price amount above the weighted average of $32 per square centimeter are classified in the high cost group and those that are at or below the weighted average per square centimeter are classified in the low cost group.

Currently the EpiFix ASP is approximately $200 per square centimeter and which fall into the high cost category. The 2014 packaged rate for the low cost skin substitutes apply to DFU’s, diabetic foot ulcers and VLU’s smaller than 100 square centimeters is $409.41 that’s $409.41. For the high cost skin substitutes; it’s $1371.19 that’s $1371.19. With EpiFix falling into the high tier payment under this two tier system is almost $500 greater than expected back in July. This gives even more flexibility for the facilities that choose EpiFix to treat larger wound sizes. This is the first area where the final rule exceeds a company’s expectations.

The second positive development is that EpiFix was extended pass through status in 2014. CMS states that a pass through payments are intended to facilitate the adoption of certain new products for a period that will lead to but not more than three years. This is where some companies who claim this new payment system quote ports innovation unquote are just completely wrong. CMS has this pass through status explicitly for new technologies, so they can be adopted with out being added disadvantage.

Additionally our view is that innovative companies in healthcare must deliver solutions that not only address a clinical need but those solutions must deliver superior clinical results at a cost that is sustainable in our healthcare system. Company’s and management teams that don’t innovate in this way will have to face the consequence at some point.

Regarding the EpiFix, the July proposed CMS or proposed CMS rule for the EpiFix pass-through status should end. In addition to our comments on the payment rule, we also commented on the ending of EpiFix’s pass-through payment. We showed data to CMS that proved that it had been reimbursed for less than two years. After reviewing the data CMS agreed and published the final year pass-through extension for EpiFix in the final rule for calendar year 2014.

This means that in addition to the packaging payment of $1,371.19, the EpiFix graft will additionally be covered with a pass-through payment from CMS to the facility which is calculated on an ASP, Average Sale Price plus 6% method per square centimeter. An additional benefit of the pass-through status of EpiFix is that although the package grade of $1,371.19 is subject to a patient co-pay or secondary the pass-through payment for EpiFix is not subject to a co-pay, thus potentially saving the patient with significant amount of money.

So let me give you a few examples. First of all, recall this change is for Hospital Outpatient and Ambulatory Surgical Centers only, not physician offices. Physician office will continue to be reimbursed in the ASP payment methodology. So let’s first look at venous leg ulcer with a size of 5 square centimeters on a Medicare patient presenting at a wound care clinic in a state where we have coverage.

In this case, our 2/3 EpiFix will be used and its price is $1,271. The application code is 15271 and has a high cost package Medicare allowable of $1371.19. Now the pass-through payment for EpiFix is also added which is paid at ASP plus 6% minus and offset the besides the grafts are not paid for twice. In this case, the net of the pass-through and offset is about $500. So the total Medicare allowable is $1371 plus approximately $500 which equals $1,871 this is compared to the graft cost of $1271.

Now if you look at a 1.2 square centimeter diabetic foot ulcer in a Medicare patient presenting in a wound care clinic in a state where we have coverage. In this case our 14 millimeter disk which cost $318 would be used. This application code is 15275 which is a Medicare allowable of $1371.19 for the high cost package skin substitute. So the facility allowable for that code is $1,371.19 and in this case the offset for the pass-through payment is actually higher than the cost for EpiFix, so then they would be zero added to their. So the total Medicare allowable in this case is $1371.19 compared to the graft cost of $318.

Now depending on the state and county that can be weight index adjusted that can change these numbers a bit, but you get to the general idea on how the billing will work in 2014. And looking forward if the packaging payment policy remains essentially the same in 2015, we expect the EpiFix will remain in the high-tier category and should have a payment package at a similar rate of 2014 rate of $1371. We can create some intermediate size to further optimize the options for physicians as well. We also expected EpiFix’s clinical performance and its range of size appropriate grafts to be a strong leader in advanced wound care space and we will continue to set the standard at the lowest cost of closure therapy in the market.

With that I will turn it back over to Pete.

Parker H. Petit

Thank you Bill and I told you it was going to be exquisite detail. This is complex, there is lot of sophistication to it and believe me, I think our group is quite on top of it, but also we understand it can be some confusion and we will always try to clear that up, so they have questions along these lines on what’s going to play out here on the CMS reimbursement side, please give us a call.

And looking into next year, remember we’ve reiterated more than once our guidance, we are doing that again. The things I have just played out here relative to CMS are particularly beneficial to us next year as we look into the up counties. On the wound care side, 75% of that market is reimbursed through the Medicare system and with these CMS changes, this bill is laid out, that’s going to be very beneficial to us.

A lot of that also will come on the commercial – the growth will come on the commercial wound care side. I mean, its paid for by health plans et cetera, and as we step into those markets, we won’t be not just billing as we have to a great extend and this last year and the year before, our BA operations will be billing hospitals, outpatient clinics and physicians. So we got a huge opportunity there particularly because of the positioning that we have now of this Medicare reimbursement change.

I want to clear up one thing before we ask for questions, someone brought me one of the questions on our website that came in and it alluded the fact that micronized product was injected into the blood stream. While micronized products are structured for use of very specific not to do that and physicians understand clearly not to do that.

Our micronized product is by instructions to be used for injecting the soft tissue only. So we want to clear that issue up.

Now let us go and turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matt Hewitt.

Parker H. Petit

Go ahead.

Matt G. Hewitt – Craig-Hallum Capital Group LLC

Good morning gentlemen, couple of questions from me. First, regarding the BLA and IND process, it sounds like that it’s going to take several months to working with the FDA regarding some enlargement of details there, but once you start that, essentially Phase 3 trial, how long do you anticipate that that will take, what type of cost do you anticipate being associated with that process and when should we anticipate maybe a word from the FDA on whether or not you have been granted biologic licenses?

William C. Taylor

Matt, we will give more specifics to that shortly, but in general, we are talking a period of probably two plus years in the case of our tissue because speaking the results, we get so dramatic over standard of care, there’s not going to be huge numbers of patients in these studies.

So from that standpoint all that moves faster than normal. But allowed this work is work done in the I&D process getting ready, getting adequate staff count with the study and our proposals to make the study et cetera. And in along those lines in the next several months some of our business will be very focused on our micronized safety data, our clinical outcomes, our clinical papers and coverage papers et cetera. As I again to make some decisions in terms of development of the transition playing for us.

You asked for costs? I would say, probably north of $1 million a piece.

Parker H. Petit

Yes, probably it’s definitely in our opinion, it’s going to take some time to work through the FDA and understand exactly what they want, but we don’t expect these to be the $20 million and $30 million types of studies that you will see in a lot of other area. That should be in the single million dollar range of the post tens of millions may be not as well as warrant, but certainly should be in the tens for each study. So it should be pretty reasonably priced and reasonably quick compared to others.

Matt G. Hewitt – Craig-Hallum Capital Group LLC

Okay, as far as and I think you need to file separate license applications for each indication, if I am not mistaken so. As you look at – you’ve obviously already had a study published regarding Plantar Fasciitis, is that likely the first license you will go after. And how many do you anticipate either desiring or needing over the next several years?

Parker H. Petit

We are going talking generally [ph] this morning. We are going to pursue our attention as we figured today in our – our intentions with – our discussions with FDA staff. One indication for tendonitis related maladies and another one for wound care – chronic wound care. So we will fine tune those depending on how we lay out the program for each one of them. And we will let shareholders to understand clearly when we have information that is we can share.

Matt G. Hewitt – Craig-Hallum Capital Group LLC

Okay, thank you may be one more from me and then I will jump back in the queue. Regarding the pass through impact, Bill thank you for the details there. How quickly do you anticipate being able to spread the word through your various customers. I mean is that something that you would see right away in Q1. Or do you think it’s going to take a little bit of time for them to understand that – they won’t lose money using up FFX or as they may with some of the competing products?

Parker H. Petit

Of course we love there to work as of January 1, but it is just amazing because there are so many changes in reimbursement every year. These folks are inundated with what is new what is next. It’s going to take some time to educate them. We have already put together the beginnings of our plan for this education. We already have a draft billing guide that we will be going out with facilities here. Shortly we will be doing Web access with these facilities to walk in through yet this month. So we will be very aggressive to educate as soon as we can.

But I think the reality it’s going to take some time over the first quarter to really get that message out. Once they hear the message they probably want to test it through a few implants before they go switch over all of their or most of their patients because they want to get confirm to get paid as they are total. So it will go through the year, we will do everything we can to make sure that these people are very well assuming and as I can starting this month.

So I would expect it’s going to be somewhat of a build up.

Matt G. Hewitt – Craig-Hallum Capital Group LLC

Okay, great. Thanks I will hop back in the queue.

Parker H. Petit

Thanks guys.

Operator

Your next question comes from the line of Bill Plovanic. Please proceed.

Unidentified Analyst

Great, this is actually Kyle on for Bill. Can you here me, all right?

Parker H. Petit

Yes, hi, Kyle.

Unidentified Analyst

Chris, I know that it’s still in the early stages and you don’t want to give too much detail on what the R&D process and study process would look like, but it sounds like you’ve already made some of the investments as far as personnel and headcount internally. And then we’re going to see a couple of studies, north of a $1 million, but less than what we’ve seen in some of the other companies.

But I guess we’re just trying to understand how long do you see the timeline for the negotiations, and the back and forth of the FDA to take before we actually start incurring some of these trial costs. Is that a 60 to 90 days and then it takes time to get tights that up, so may be this is a more of a beginning of 2015 event or is this end of 2014, just trying to get any color there so we can start thinking about where those costs were heading?

Unidentified Analyst

Well, when we were asked the similar question about what happen to day in terms of press release, we said two weeks, two months and we’re hitting that time, right. I’d say management as we sit here today probably just rather give us a lot more time to tour one more visit with FDA and BLA some of those, to the extend you want the specifics. So just give us a little flexibility, but I think it’s probably going to be minimum of three months down the road to six months down the road before we know exactly where we stand with that transition plan and so on?

Parker H. Petit

And I’ll just jump in there, just remind – remember we have the terminology here SOP, which is speed of heat. The Federal government does not work at the speed of heat. Just to remind you that, so we will have certain constrain relative to the speed of which the FDA move, so obviously we will do everything we can to move as fast as possible, but there will be some constrains that we have no control over. So in terms of your question relative to the clinical study costs, I would say it’s going to be the backend of next year or later in terms of the big dollars associated with those.

Unidentified Analyst

Great, okay. And then just one other question here and it reiterated in 2014 guidance and it sounds like you’ve prepared the component and the fact that you’ll be able to keep the micronize product on the market. I think you had initially commented that you expect that to be around $15 million in 2014? Can you kind of just walk through, what the proposal looks like keeping on the market? It sounded like you would may be change some labeling or some indications and what that might due to the actual market potential and does it restrict physician views and things of that sort.

Parker H. Petit

Well, that’s clear up – clear up one issue. We've tried to say in our press release and we’ll say it again. We can end up with having the micronized taken off the market totally. We can end up with some intermediate position for some indications or have it left on, as it sits today. Hopefully, it’s somewhere in between as a minimum. However at this stage and we try to see signal that clear in the press release, these plans of transition plans that are few and far between. We think we've got a safety data and the clinical data on the product and so on to get go on good candidate for transition plan. So just have to let that play out over the next number of months.

Unidentified Analyst

You mentioned that 15% or over, had Mike talk about that.

Michael J. Senken

Yes, I think Kyle in our communications we've said that based upon what we know today, we’re still reiterating our guidance. So it’s the PK of a pretty broad range of outcomes in terms of the FDA and we still feel good about our guidance next year of $90 million to $110 million. What we have communicated prior is that the micronized as far as our early planning goes for 2014 was 15% of that guidance.

But I should give you some indication that management is very confident these numbers as we sit here today based on information we have today and a great deal of that confidence has been added to by the fact that the CMS pricing is certainly going our way. So we think as we roll into next year we’re going to see a lot of new business coming our way as a result of the CMS initiative pricing change.

Unidentified Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of Bruce Jackson. Please proceed.

Bruce D. Jackson – Lake Street Capital Markets LLC

Thank you. With some the new studies that are required, is there any chance that the FDA will accept data from studies that you’ve already completed?

Michael J. Senken

Well, it depends on what you mean by accept. Working on the transition plan I certainly will because that’s where they and how they make their decisions, in terms of BLA itself. Those kind of decisions from the FDA is sometimes hippy, because often those programs aren’t laid out exactly the way they want them laid out and don’t have all the endpoints you’re looking for. So that’s too early for us to answer that question, but to mean I don’t know that’s going to speed up the process. I think we’ll move fairly quickly because of the way we do business, but we also move fairly quickly through these programs because we shouldn’t have to have huge number of patients because of the clinical effectiveness of what we do.

Parker H. Petit

I will add in there Bruce that we have had conversations technical folks at FDA and the technical answer is possibly. There are a number of steps, as you know, that lead up to the Phase 3 trial, and we may have enough data and information to skip some of those steps, but obviously the FDA can’t comment on it because it’s a very thorough process. We’re going to have to look at the information and so forth and a lot of detail and review it. So they can’t make any commitment at this stage because we are at the front end of the process. So the answer is possibly, but we need to do more work with the FDA before we know which of those steps may be appropriate, but we already have data to it.

Bruce D. Jackson – Lake Street Capital Markets LLC

Okay. Good. Then in terms of the timeframe required to work through all these things, you said it would take in this is a thing, if I know a rough guess, but two years to get, was that to get all of the indications through the FDA or the time to getting of the first approval, just want to clarify that.

Parker H. Petit

Well, we’re sitting here smiling to each other. Most probably it could be one or all. There’s still too much of an unknown forums.

Michael J. Senken

And it could be two or could be plus. There’s a lot of other information we need to have before we get better information in terms of the schedule right now.

Parker H. Petit

And again I think just in terms of maturing of our corporation we’re going to be involved with BLAs from now on. That’s going to be part of our life. And if weren’t for these, as I mentioned, we were last summer trying to get an audience with the FDA to get our first two thoughts on BLAs and that they relate to cardiology and that gives a dermatology initiative. But BLAs are going to be an ongoing process here. We’ve got quite confident staff with our scientist and MDs.

I went through two PMAs in my previous companies, so I know the rigor and I know the patience required and the expertise required. I think we certainly have it, so this will be just ongoing discussions and we will be asking this question a year from now, what about this BLA? What’s next BLA? BLA is going to be part of our language moving forward.

Bruce D. Jackson – Lake Street Capital Markets LLC

Okay, got it. And then just a touch on the guidance for next year briefly, so the micronized products are part of that guidance and I am assuming that the current applications are primarily focused on wound care, is that correct?

Michael J. Senken

Yes, we have tendonitis and wound care. I think what we have seen so far this year from the return of our tissue utilization record or TUR cards that more than half of that has been in wound care, I don’t have the exact number in front of me, but certainly the majority of it has been in wound care, although there have been other tendon type applications as well.

So again, we mentioned before that what we really don’t have and we do have to pull the micronized after market that a lot of those people, those physicians will migrate back to the sheet product and continue using them, so it won’t be an all or nothing proposal for us moving forward.

Bruce D. Jackson – Lake Street Capital Markets LLC

Okay. And then with the Medtronic supply agreement, was that also initially part of the guidance or is that outside of the guidance and then, do you have any new information on how that agreement is rolling out?

William C. Taylor

Well, you keep trying to dig it at that column – the balance we have buried. These are accounting group about having their financial bonds buried. We always have contingencies, so just take it at that. When we give a range, we’re still compliment range, that’s why we have been pretty successful last three years of hitting our numbers, so Medtronic is going to be a nice part of revenues next year, not a huge part, but it will be additive and…

Michael J. Senken

Yes, Bruce just, this is Mike, just to add on this. Obviously with all the changes going on whether it will be reimbursement in some of these other areas, I think what you are getting at is, should we move the guidance. We feel good about the ranges that is right now, let’s look at what happened in the first quarter, we think there is tremendous upside because of CMS, but let’s see what happens going into next year.

William C. Taylor

As you can say relative to the implementation of Medtronic, but the only thing we can say there is, they are moving forward, but they don’t work at a speed either.

Bruce D. Jackson – Lake Street Capital Markets LLC

Okay, last question. So there is still some macro doubts, what it does, the publication of the new skin substitute reimbursement, do you think that’s going to help move the remaining match to come out with some policy decisions?

William C. Taylor

We certainly do in fact, that’s a good question, because we’d previously given some thoughts that we’d get the last remaining match done by this fall, certainly by the end of the year and what we again realized as we had conversations with them was that they were basically going to wait until the CMS pricing change which disclosed. So I think once now that’s out, that I want to clear up the issues in terms of how they are going to deal with this.

Bruce D. Jackson – Lake Street Capital Markets LLC

Okay, thank you very much.

William C. Taylor

Thanks Bruce.

Michael J. Senken

Thanks Bruce.

Operator

Your next question comes from the line of Suraj Kalia. Please proceed.

Suraj A. Kalia – Northland Securities, Inc.

Good morning gentlemen.

Parker H. Petit

Good morning, Suraj.

Suraj A. Kalia – Northland Securities, Inc.

So Pete, let me start out with one question for you and then I’ll move on to Mike. There was a whole host of 361 untitled that went out as we know in the space, and I confess I haven’t completely got my arms around all the dipping result in that. Has there been any other company that you know of that had received an Untitled Letter related to micronization or meshing up their product that now has been resolved and the reason, just if you would love to give some color as if you guys having an ammunition in the background saying, hey, FDA you resolved it for them, why for us so differently.

Parker H. Petit

Well, first of all, and I can understand why having had the interaction with the FDA staff and set to an association meeting with them. They necessarily play the cards close to their vest. They’re not going to talk very openly in sessions like that even sometimes with us, just on our subject matter. They’re not always as open as we like them to be, but we understand often why. We do know that a number of the Untitled Letters has been out because we found about anyone we can find. In those Untitled Letters the FDA was very specific about asking the company to remove the product from the market. As everyone knows because I’ll let public action on what they asked us to do and our only delight in getting this resolve was a fact we didn’t know specifically what they thought the issue was, gave that to us.

But we can’t specifically relate to someone else’s track because the agency will tell you very quickly, well, that’s them. It’s not you and we’ve been told that and well, we clearly understand that. So that’s not necessarily a correct period, seems like it would be, but it’s not. So each situation is taken individually because there are so many variables associated with each situation and that’s what this information will be – we’re working with them on in the months ahead in terms of our safety and our other clinical trails et cetera and the totalitarian nature of the information we bring to them. That’s how the decision will be made and they will pay you real quickly. Well, it doesn’t matter Company A got to the process and Company B didn’t. You’re Company C and it’s a totally new bargain.

Suraj A. Kalia – Northland Securities, Inc.

Fair enough. Mike, moving on to a reimbursement question, obviously you did pretty detailed math on the call. Let me ask a hypothetically here, Mike. Let’s look faster forward. The total payment is 13.71 and I have my own outpatient center, I have to treat a certain wound, that’s the idea few of a certain size and frankly speaking let’s assume for a second I have to be conscientious of the cost that I’m doing given all the products that I’m using.

Based on what you guys see, Mike, obviously clinical efficacy is one component of it. Do you see a scenario where to treat a certain wound of a certain size clinicians might choose or end up choosing a lower cost product? By lower cost I mean greater than $32 in the higher tier category, but still there is such a huge standard deviation between the different products. I’m just curious how you all see this playing out where some centers would choose a product X that cause $40 per centimeter square versus something else that would cause $160 per centimeter square, so that we could see the delta and at least on paper show profitability.

Parker H. Petit

Well, our sales probably got something to say. Since I’m the elder I’ll go first. Cost to closure is something that we have been focused on ever since we launched these products and we have a lot of our cost effective white papers et cetera built around that. And I know because our competitors try to use it for two years, while our cost per centimeter is higher than theirs, yes, but our cost to closures mostly lower than yours. So you take in account the cost of the – because our grafts are appropriately sized, there is appropriate size of the wounds. So you had very little wastage and that’s where the relations have come in and the focus on skin substitutes is a huge wastage that occurred with the two large providers for the industry. It was huge wastage factors.

So they will take a look at the size appropriate graft with cost of that. You heard Bill with his examples a minute ago. $300 is the cost of our graft for average size diabetic foot ulcer or medium size, so the session kind of starts there. The clinical effectiveness of our product has just started. We haven’t seen anybody yet. If you go face-to-face with us you are going to lose. It moves wound closure much faster. So you start there and the cost per square centimeter is pretty irrelevant when it comes down to the cost of closing the wound and not letting it dry out and potentially developing infections et cetera, et cetera.

William C. Taylor

I’ll build on that. This is Bill again, just from my earlier conversation too. The point about the cost per square centimeter, our competition likes to point at it, because our cost per square centimeter is higher than theirs, but what they fail to point out is that they have a whole lot more centimeters. So even though their cost per centimeter is lower than ours, we’ve got a lot of centimeters anywhere from 37.5 square centimeters for one of them, 34 square centimeters for the other one. So they are $1,600, $1,700 a piece for their graft. They don’t have size appropriate grafts like we have.

So as Pete mentioned, size appropriate and cost of closure is what we focus on. Our clinical data have shown and frankly the data in the hands of real users out there day-to-day have shown we’ve got numeric examples of VAs where we’ve done healing reviews and the average is tend to be around two and a half to three applications to close a diabetic foot ulcer.

Our competitors look at all the published data, five to eight and they’re way bigger. So they waste a lot more material. So, yes, our cost per square centimeter, little more expensive, but you need a lot less centimeters and the overall cost of closure is less.

So to your earlier question, going into 2015 at 13.71 payment, I mentioned in my discussions, 77% of all diabetic foot ulcers and 66% of venous leg ulcers are five square centimeters or less. That means we could use our six square centimeter graft or we could most likely add one or two sizes in between our two small ones, down somewhere around a four or five square centimeters that will be around $1,000 or less and the facilities will still be in the black when they use our tissue. So we’ve got a very strong case not only in 2014, but also going forward in 2015.

Suraj A. Kalia – Northland Securities, Inc.

Fair enough. Mike, let me come back again and the last question and I’ll jump back in queue. Forgive me if this is an unfair question, but at least I will try. For next year’s guidance what is the contribution at least you all have thought from [indiscernible]. And I understand you guys haven’t specifically targeted no matter any color would be great. Gentlemen thank you for taking my questions.

William C. Taylor

So your question is, what is the break out of the revenue between commercial and government or the VA. Well what we pointed to is that if you look at the low end of our guidance this year and the low end of next year you are talking about 57% increase in revenue. What we said in other investor presentation is the primary driver of the growth is going to be on a commercial side. So where this year the percentage of revenue on the government side is close to 60%, obviously that percentage will come down as the percentage of the total next year.

Now we haven’t given guidance on that. There will be growth on the government side next year and it’s included in our guidance. But the majority of the growth is going to be on the commercial side.

Suraj A. Kalia – Northland Securities, Inc.

Gentlemen, thank you for taking my questions.

Parker H. Petit

Thanks Suraj.

Suraj A. Kalia – Northland Securities, Inc.

Thank you.

Operator

(Operator Instructions) Your next question is a follow up from the line of Matt Hewitt. Please proceed.

Matt G. Hewitt – Craig-Hallum Capital Group LLC

Thanks for taking the follow up question. And you started to get to the point that I think that I was hoping that she would answer and that relates to the commercial opportunity. And I realize that it’s very early CMS just came out of bundled payments structure but I am curious if you heard anything from the commercial peers as to intentions going forward on their pricing structure.

Parker H. Petit

Well this is Pete. On kind of the reimbursement may as you’re around here, because I have been around longer than anybody else and I have been dealing with insurance companies longer and some people being live. So I am very involved in the whole reimbursement process in the company. We have weekly meetings sometimes, daily meetings, sometimes hourly meetings, because it’s a very active pro-active process and we have a lot of initiatives going on to encourage health plans to turn over our switch and reimburse for our allografts.

The CMS initiative will help that a lot, clears up some things and we detected this fall a lot of them waiting, because the skin test to this area has been an area of frustration, the same as but also help land. Skin substitutes kind of gallop a bad wrap, because of some others wastage issue that have been obviously going on. So I think this is going to be a replacing interlude for us to be able to bring some of the health plans to the point where they are clearly reimbursement and there is no issues for it.

So this set we say we made a lot of progress this fall. We have a lot of momentum. We have a lot of people focused on it including the company’s CEO. And when our sales force asks questions I say gentlemen I go to bed thinking about it and I wake up play the barrel so. Reimbursement we have a lot of very experienced people that have vanished for decades. People on our staff here the same type of experience. And we expect to see some real interesting up ticks next year as we fall into the of getting switches around the health plan after health plan across this country for the commercial side of it.

Matt G. Hewitt – Craig-Hallum Capital Group LLC

Pete great thanks for taking the questions.

Parker H. Petit

Thanks.

William C. Taylor

Thanks.

Operator

I will now like to turn the presentation back over to Mr. Pete Petit for closing remarks.

Parker H. Petit

Thank you. Well we have another hour of lot of discussion and I hope we answer most of your questions. Thank you it’s safe to say that management views the last week of press releases some very positive results for the company. Taking the CMS side of it in terms of focusing on revenue and on the FDA side, getting lot of the issues clarified for us, so we can move forward with these DLAs which again are going to be an inherent and [indiscernible] part of our future. There will be other information commentary as soon as it’s relevant and we’ll keep you informed and thank you very much.

Operator

Ladies and gentleman this concludes today presentation. You may now disconnect. Have a great day.

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