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MiMedx Group, Inc. (NASDAQ:MDXG)

JPMorgan Healthcare Conference Call

January 16, 2014 12:00 PM ET

Executives

Parker H. "Pete" Petit – Chairman of the Board and Chief Executive Officer

William C. Taylor – President and Chief Operating Officer

Michael J. Senken – Chief Financial Officer

Analysts

Ross W. Comeaux – JPMorgan Securities LLC

Ross W. Comeaux – JPMorgan Securities LLC

Good morning and welcome to the MiMedx presentation. It’s my pleasure to introduce "Pete" Petit Chairman and Chief Executive Officer. And as a reminder, we’ll have a Q&A session immediately following the presentation in the Sussex room. Pete?

Parker H. "Pete" Petit

Thank you, Ross. I have with me Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Chief Financial Officer. And now both will make presentation shortly and mine will be brief. Mike’s will be brief and Bill’s will fill in up the majority of the information.

MiMedx focus is on regenerative biomaterials, specifically amniotic membrane, tissue allografts that have been shown to be Stem Cell Magnets. We have a very unique technology platform with robust patent protection. We have nine patents issued one more we’ll issue in the next month and 50 more in process. We have a proprietary PURION Process which produces our grafts which are a logistic success. Our grafts come out as a room temperature stored devices that are, can be stored for five years. The logistics is a major contribution of our technology.

We have shipped over 200,000 of allografts over the last six years. Our allografts are supplied at numerous sizes from small sizes used in the eye to medium sizes for venous leg ulcers, diabetic foot ulcers and large sizes for surgical and/or burns usage. We have numerous published studies both scientific and clinical. Over the last three years, we’ve had very robust growth averaging over 100% a year. We’ve given a straight guidance of our revenue should be in the $90 million to $100 million of this year.

Over the last two years, we’ve had positive EBITDA and we just raised $36 million of new funding for the corporation. We’ve made very rapid and effective progress on reimbursement. It comes from I think our decades of experience particularly mine, but also our Chief Medical Officer’s experience, he was Chief Medical Officer at Harvard for 12 years. So that kind of intimate knowledge of what really happens on the reimbursement side has been very helpful to us. I think most companies underestimate the rigor associated with the reimbursement portion of their business. We have six of the eight Medicare intermediaries covered in our EpiFix allograft which is used in wound care, the final two, I’m working on personally.

We recently received very good news related to changes that CMS made for reimbursement of skin substitutes, Bill Taylor will discuss this in some detail. This change produces an extremely favorable payment environment for our EpiFix allograft for this year. It produces a very negative payment environment for our two major competitors. The one key issue that’s been very key to our growth is our management. You cannot grow a company at 100% a year plus without having a key management to bring to the team at the right point in time. Mostly as people have been working with me in our previous company include Bill Taylor. Bill and I have been together now 15 years. Some of these individuals have worked for Bill in Bill’s organization as well as my organization.

So I’ll turn this over to Bill Taylor and I’ll let him fill in the details. Bill?

William C. Taylor

Thanks Pete. As Petit mentioned, our primary product is transplanted dehydrated human tissue process through our proprietary PURION Process. So they’re allografts from the placenta, we call it dHACM or Dehydrated Human Amnion/Chorion Membrane. Now as many of you probably know placental tissue has been used for hundreds of years for various applications of first publications over a hundred years ago for use in burns and it’s – placental tissue has very recognized property such as enhancing wound healing, reducing scar tissue formation, reducing inflammation and it’s also non-immunogenic.

So the real break-through here is that our PURION Process tissue is very – PURION Process is very gentle to the tissue and it produces a graft that’s safe and effective. It’s very easy to handle and has a five-year room temperature shelf life. So it’s not cryopreserved and with the inherent difficult in handling characteristics like many of the other ones that are out in the market and this process is so gentle that it retains the growth factors in cytokines and the key elements that make this tissue so prolific and essentially the same amounts as in fresh tissue.

Our two main trade names are EpiFix and AmnioFix. Many of you probably know AmnioFix is our tissue that’s used in surgical procedures, is basically an internal graft used to help reduce scar tissue formation and also to reduce inflammation. We also have an injectable version of AmnioFix. EpiFix is also our amniotic tissue but it’s configured a little bit differently than AmnioFix and it’s used in external application such as chronic wounds and acute wounds scar reductions and things like that. So key takeaway here is very simply this – that our tissue helps facilitate soft tissue regeneration, not just dermis or epidermis like some of our competitors.

On the science side, some of you may have seen this publication that we had last year. This is – we are very excited about this. It’s our first publication in many. We’ve actually going to have probably another two or three that are published in the next three or so months on the scientific side that basically these publications are explaining why this tissue is as prolific as it is and is clinically effective as is what it is. The bottom line here is that that you don’t have to add living cells to a wound to heal it when you can attract your body zone. This first study was actually conducted at Stanford University Medical School and at Georgia Tech and explains how our tissue acts as a Stem Cell Magnet. So again, some of our competitors may tell you, you need to add somebody else’s stem cells to a site to heal it, but that’s simply not true. If you can modulate the wound bed and you can attract the body zone stem cells, you can actually have a very favorable healing environment.

In our scientific studies, we’ve identified over 70 growth factor cytokines enzyme inhibitors that are present in our PURION Process tissue and again, at basically the same levels as fresh placental tissue. In this particular scientific study, several of these growth factors and cytokines and soluble were identified, some of them were inflammation regulators, some interleukins and so forth. But basically what the paper describes is how this tissue modulate the inflammatory process and how it induces regenerative cell proliferation for the cells to come in and form a matrix and then what it also shows is, how that prevents that matrix from being degraded which is one of the issues on a chronic wound.

The matrix has been created, it continues to get broken down. Therefore, we have that chronic wound. Then it accesses a Stem Cell Magnet, brings cells in which differentiate into their appropriate cells and then heals the site. So again, you do not need to add living cells to the site when you have a Stem Cell Magnet product like ours.

So in summary, placing our tissue on a chronic wound, basically brings in the presence of the extra-cellular matrix, extra-cellular membrane that our tissue has, plus the growth factors in cytokines beside of injury and stimulates the cells to proliferate and migrate. So truly, amnion is really the original regenerative material, regenerative biomaterial and our PURION Process tissue just retains those characteristics.

Moving on to regulatory. So as you probably know, human tissue is a very highly regulated area, but it’s differently regulated than medical devices, and the key to this is basically in order to be solely regulated under Section 361 of the Public Health Service Act you have to meet four main criteria. The first is that you can’t more than minimally manipulate it, which means you can cut it, you can slice it, but you can’t do things like cross linking in order to make it stronger.

The second is it must be promoted from homologous issues basically indicating that the function post transplant is consistent with the function pre-transplant. In the case of amniotic tissue, reducing the scar tissue, enhancing wound healing, reducing inflammation are all things that it does in the body originally. So therefore, you can talk about that post transplant.

Third thing is you cannot combine it with another article except for water, crystalloids and so forth. And the fourth thing is you cannot have living cells in the tissue if the metabolic activity of those cells are responsible for its primary function. So as long as you meet all four of those criteria, it can’t be regulated solely as a 361 tissue.

Now, if you’ve been following our press over the past number of months you’ll notably received an untitled letter from the FDA in August for our micronized tissues. So micronized tissue this year is only representing an estimated 15 that’s a 15% of our business, so even though there are a number of tissues that are micronized and regulated as 361. So it’s clear and we’ve mentioned this in our conferences, our calls in the last few months. It’s clear that the FDA is taking a new position where they want to regulate this micronized amnion differently than what they have in the past.

So as we press released in December, while we don’t agree with the agency’s assessment, we have agreed to pursue the BLA and propose to enter discussions with the FDA to negotiate a transition plant to take the micronized to becoming a license biological product while we continue to market our micronized product. So we’ve already begun those discussions with the FDA. We’ve had several discussions. We’ve asked for our first face-to-face meeting in this process, hopefully that will be in late February probably fall by second meeting a roughly month after that and by then we hope to affect that transition agreement with the FDA. And again, this is only 15% of our projected business this year. So it’s not a large portion. But we do think that by having a BLA process now we think we can actually create some very strong competitive barriers and then have a really strong advantage over a competition.

Moving on to Page 12 in reimbursement, because there are a lot of different uses for our tissue there is a lot of different ways for reimbursement to occur. The main product line for us right now with reimbursement is in chronic wounds. We received our Q code in January of last year, Q41, Q31 and which basically opens the door to have you be able to be reimbursed, but as you know, just because you have a code it doesn’t mean that you automatically get reimbursement. You have to then work through all the different regionally intermediaries or MAC groups and with those, we were very fortunate. And through the first part of the year, we got through most of them and now we are, as Pete mentioned, we are through six out of eight which covers about 86% of the country. So we have a very good coverage there.

And just to put it in a frame of reference, Pete mentioned our management team. We do have a great management team and we’ve been here and done this kind of thing before. This regular – the reimbursement environment today is certainly more difficult than what it has been in past years. And to give you a frame of reference, there are about five other companies that received a Q code at the same time as us and none of them got through the MACs and we’ve got through six out of the eight. So that shows you kind of a relative experience of our management team versus those other companies’ management teams.

One other thing I want to mention here is there is a new hospital outpatient rule that I’ll be talking about in a second where CMS is packaging or bundling their payment system. This is a direct result of wastage in the skin substitute category and what we are trying to do is help elevate this category and garner some new respect because in the past, there has been a lot of things that have challenged that and wastage was a big one. We’ve looked at the Medicare data in 2011 into the hospital outpatient setting a loan. There was $101 million in spend and of that, over $75 million of that went right in the garbage can, just wasted. So that’s the reason that CMS is really working on or focusing on it and made a change for this year.

So here is a slide that will show you the wastage for our two primary competitors. The median VLU size is 2.3 square centimeters, the median diabetic foot ulcers are 1.35. So all that grey area you see there, at least 50% a time thrown away. So there is a lot of wastage there and finally, the CMS was fed up with it and they decided to do something about it.

So let me explain that just real briefly. So when 2013 in all settings, physician office, hospital outpatient and ambulatory surgery center basically was reimbursed, the facility fee or physician fee and then the graft was reimbursed separately at ASP average sale price plus 6%. But they made a change this year where the physician office is still reimbursed the same, but hospital outpatient and the ambulatory surgery center is paid differently. So basically, they are bundling the facility fee and the graft fee together in one payment. They actually created two tiers one for a low cost skin substitutes and one for high costs.

So our competitors complained at this new system for its medical innovation. Just don’t let them mislead you on that, okay. Don’t let them mislead you. The only thing, of course is medical wastage okay, and another thing is very important. Now I’m not sure that those 15-year or 20-year technology was that innovative anymore quite frankly. But our view is that truly innovative companies will create technologies that not only work very well therapeutically, but they’re also going to work well in our current reimbursement environment. You have to think about reimbursement when you’re developing products. You can’t have something that works really well, but can’t be reimbursed. So you have to take that into consideration, and EpiFix score is very well on both fronts.

Here’s some examples with a couple of different sizes of our EpiFix. I’m not going to go through the detail there, but this also shows our pass-through status and how that is affected into the rates. I’ll be happy to go into detail on this when we take our breakout session, but rather go into detail during this. I’ll just talk more generalities. But relative to the first quarter, this – the bottom line of this change is very, very beneficial to us as matter of fact is the finer role ended up being much more beneficial to us than what we thought the proposal would be and we thought that was going to be very beneficial. So understand there is a lot of changes in reimbursement right now. So there is a lot of confusion.

We are actually out educating these facilities now to help them understand it. Remember that typically these new rules come out around Halloween, but this year it came out around Thanksgiving so it’s about a month late. So there is a lot of changes, a lot of – people just wondering what these changes mean. But when we sit down when our reimbursement people sit down with these facilities and walk through some of the changes, I just had an email yesterday about a meeting that we had, one of our reimbursement people had yesterday and that solely said no more Dermagraft, Apligraf, we’re only going to use EpiFix and that starts tomorrow. So once they understand the positive reimbursement effects here we are getting some very, very good movement.

So one other thing too on this innovation, CMS already has a mechanism to deal with innovation and so it’s called the pass-through status, which basically means if you have a procedure that’s packaged, if you have a new product you apply for pass-through status then for a minimum of two and a maximum of three years you are allowed an incremental payment on top of the bundle rate to help deal with, a new company is getting a foothold into the marketplace. So CMS already has a methodology for these innovative technologies, so this isn’t really affording medical innovation as they would allege.

Changing gears now to our donation, I think many of you probably have seen this it’s a popular question, how ready is the supply? Frankly, supply is not an issue for us. We’ve got 20 hospitals that can easily support our revenue for this year. 20 hospitals can easily support about $100 million in revenue. We’ve got another 75 hospitals that want to join the program. We just haven’t signed them up yet because we don’t need the placentals. So it’s a very strong supply for us.

On the market opportunity side, there are millions and millions of procedures that could benefit from our tissue. We’ve added that up to the United States alone, we think it’s an excess of a $13 billion market opportunity. I remember there is a lot of different opportunities for this tissue, but this tissue is not a hero okay. Remember that our PURION Process tissues have three very key characteristics that are fundamental to it, reduction in scarring, reduction in inflammation and enhancing wound healing. So those are fundamental properties that if you have a soft tissue injury that could use one of those elements that our tissue could be beneficial.

On the intellectual property front, Pete mentioned this is one of our strongest assets. We’ve got nine patents that have issued. We have another tenth patent that we’ll be issuing in the next three or four weeks. We got about 50 patents that are pending. So and these are revolving around our process, revolving around our configurations as well as blocking patents, making it more difficult for people to come in and trying to design around our IP. And we’ve got great coverage. The earliest of these patents expires in 2028, so we’ve got a lot of runway ahead of us.

Moving on to the clinical side, we’ve got one case study here. We’ve shown it before very amazing results. We had an indigent patient that was scheduled to have his foot amputated. And the doctor decided he was going to try EpiFix kind of the last resort and in two applications and just little over a month the foot was fully healed the patient was back to the walking normally on it. We get examples like this almost every week.

Fine, I’ve got a little bit of new information to relative to our clinical studies. You’ll recall that we published our first clinical study last year where we had 90 – little over 90% healing rate in just six weeks. Now that was with a small population. It was only 25 patients, but it was so drastically different. We had a p value point less than 0.001 which is fantastic, while we have a second clinical trial on diabetic foot ulcers that we’ve submitted for publication that should be published in the next month or so electronically where we looked at weekly applications versus biweekly applications of EpiFix, we got 40 patients in that study plus we had our crossover study.

So when you aggregate these studies and we had 62 patients where EpiFix was applied sometimes weekly, sometimes every other week, 59 out of 62 of those patients were healed in 12 weeks, 59 out of 62. This is compared to Apligraf’s PMA study, Dermagraft’s PMA study, Dermagraft’s 39 out of 130. So we had almost twice as many people healed in about half of the population when you look at these aggregated data. So huge difference here.

Also one of the slides we have in the back of our presentation, it shows our biweekly applications of EpiFix has an average time to closure of 29 days, while Apligraf’s published average time to closure is 65 days. Grafix from Osiris is 70 days from their study that they announced. So 29 days for biweekly for us versus that 65 days and 70 days or weekly. Weekly application is 17 days average days to closure. So we have phenomenal results compared to the competition clinically. So you’ll be seeing very shortly as other clinical study published plus we have two more studies, one VLU and one DFU study that we expect to finish in the first quarter and submit for publication in the second quarter.

On our sales force, you probably remember that early in 2012, we were in our distribution, distributor in sales agent model and we changed that mid-way through 2012. So in the last 18 months, we went from zero direct sales people to the end of last year we’re at 76 direct sales people. So for this year, we’ve extended offers for another 10 sales people. We expect to have another 10 offers go out in the next week or so. So we will have somewhere between 90 and 100 sales people by the time we have our sales National Sales Meeting in the middle of February. And then for the rest of this year, we’ll probably add another 30 or 40 on top of that based on these favorable CMS results. And you can see the way that our revenue has ramped since we made those changes.

And with that, I’m going to turn it over to Mike Senken, our CFO.

Michael J. Senken

Thanks Bill. I’ll run through the numbers real quick. Again, of course, we are in a quite period right now, so I can only review up to the third quarter of 2013. One other note on this slide, it’s meant to depict the movement from a distribution sales model to a direct sales model for wound care. We ended 2012 with 33 sales individuals, we ended 2013 with 76. We could have added more in 2013 but as both Pete and Bill emphasized, the game is all about reimbursement and we do not add sales people as we can answer the question when we go into the doctor’s office, “Will I get paid for this device?”

And again, with a number of new entrants out there talking about getting into the wound care space, maybe they’ve entered into an agreement to source placental tissue. Don’t forget the difficulty in terms of getting reimbursement and how much time it’s going to take for them to get where we are with a very experienced management team. So to run some numbers very quickly here, on a year-to-date basis, we were at $41.2 million in revenue which is 149% year-over-year increase it was for the quarter, a 19% sequential increase in revenue. And again, we like to point out that for the eighth consecutive quarter, we met or exceeded our guidance.

So now we’ll talk about guidance. For this year, we’ve guided $57.3 million to $60 million and – in 2013. Now in 2014, which I’ll talk about in a few minutes, we’ve guided $90 million to $110 million and we’ll talk about that in a few minutes. We started breaking out in the third quarter of 2012 revenue by therapeutic area. For this year, roughly 56% of our revenue will be wound care related and 39% will be surgical and sports medicine. When we look out to 2014, the wound care percentage will of course increase based upon the data that that Bill showed in terms of reimbursement in the wound care space.

Talking about revenue by customer type, we break things up between our government and our commercial. We started in 2012 investing in the direct sales force primarily for the government accounts. We continue to add more government sales in 2013, while we started adding commercial sales in 2013 as well. For this year, roughly 60% of our revenue will be government sales and 40% will be commercial. That percentage – those percentages will flip in 2014 as we build out the sales force on the commercial side.

Talking about 2014, we guided $90 million to $110 million that’s between a 50% and 92% increase over 2013. In terms of a breakout between wound care and surgical sports medicine, we are looking at 80% to 120% growth in wound care, 20% to 50% growth on the surgical sports medicine side. On the government versus commercial, government growth will still be strong at 15% to 25%, but the real growth is on the commercial side between 100% and 180% growth.

Just couple of other key points. We have been EBITDA positive for seven consecutive quarters. But as we’ve said on numerous earnings calls, we are balancing EBITDA with investments and growth and we have a tremendous opportunity. We’ll continue to balance those investments ultimately driving to overall profitability, but we need to take advantage of the market opportunities. One other point on the third quarter, it was the first quarter in our history where we were operating cash flow positive and we feel very good about that.

In December, we completed offering and we raised $36 million that the offering was very favorable, it was five times over subscribed and we’re using the cash to invest in clinical trials, add to our sales force and our reimbursement group.

With that, I’ll turn it back to Pete.

Parker H. "Pete" Petit

Thank you, Mike. As you can imagine this management team is looking forward to 2014. We expect this time next year to be the unquestioned leader in the advanced wound care sector of healthcare and then moving on to other places. We will meet you in Essex [Ph] room for questions. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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