MiMedx Group Inc. (NASDAQ:MDXG)
Q4 2013 Earnings Conference Call
February 26, 2014 10:30 AM ET
Thornton Kuntz - CAO
Pete Petit - Chairman and CEO
Bill Taylor - President and COO
Mike Senken - CFO
Matthew Hewitt - Craig-Hallum
William Plovanic - Canaccord Genuity
Bruce Jackson - Lake Street Capital Markets
Good day, ladies and gentlemen and welcome to the Q4, 2013 MiMedx Group Inc. Earnings Conference Call. My name is Whitney and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions) I’d now like to turn the call over to Mr. Thornton Kuntz, Chief Administrative Officer. Please proceed sir.
Thank you, operator. 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 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 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 statements, 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 MiMedx’s Chairman and CEO, Pete Petit.
Thank you, Thornton and welcome to our year end 2013 conference call. I have with me this morning Bill Taylor, our President and Chief Operating Officer; and Mike Senken, our Chief Financial Officer, Thornton Kuntz and some other corporate executives. Let me start by saying that fiscal year 2013 was an exceptional year for MiMedx. We face a number of hurdles that may have crippled and organization with less seasoned executive team. We came out of year with a substantial degree of organization maturity from the 2013 challenges and are far stronger and better prepared organization to lead the various opportunities on technologies going well.
While overcoming our challenges, we continue to produce a prolific growth rate in revenue, reimbursement coverage, clinical studies, publications, protection of our intellectual property and building out of our comprehensive structure. I would characterize 2013 as a coming of age year for MiMedx while we have demonstrated that our organization has a talent, products and strategies to optimize on business opportunities. I would like to comment on the goals we have set out to achieve in 2013, the unexpected challenges we faced and results we have achieved.
First revenue of 2013 of $59.2 million was approximately 2.2 times our 2012 revenue. We exceeded our full year internal budget revenue of $53 million by more than 10% and that’s for year information as the goal set by our Board of Directors for the management team. The fourth quarter of 2013 was a ninth consecutive quarter where we met or exceeded our revenue goal. The fourth quarter of 2013 marked a eighth consecutive quarter of positive adjusted EBITDA. The Company’s full year 2013 gross margin was 84% or 3 percentage points improved over the 2002 gross margins of 81%.
In the third quarter, we achieved our goal on having a positively quarterly cash flow from operations. This is a first time this milestone is achieved in company’s history. The fourth quarter cash flow from operations continues to move this positive trend. As Bill Taylor will discuss shortly, we significantly expanded our sales force as we received additional Medicare or MAC coverage for EpiFix wound care allograft. We expanded our access to the spinal surgery sector during 2013 by entering into a distribution agreement with Medtronic. Medtronic will provide its PURION Process allograft products too; we will provide our PURION Process allograft products for Medtronic to be marketed, utilizing a private label for spinal applications.
This is a strategic initiative that will expose our allografts to Medtronic’s physicians and patients serve through extended distribution arm thus allowing us to capitalizing on the presence of Medtronic has in a spinal surgery market. The FDA’s Untitled Letter requesting micronized products established for marketing solely under Section 361 will serve the unexpected event in late August. I am very satisfied now how well our organization responded this issue. We will add on our many years of experience and the wealthy relationship we have developed over the years, we think that, due to our quick and detailed response to the FDA and our clear messaging to the investment community, position customers this matter has, only have minor impact on company’s operational growth.
We have begun discussions regarding the BLA process for certain micronized products with the FDA. Also as we previously discussed, we hope to be able to enter into a transition agreement that allows us to continue to market our micronized products while the FDA process is underway. Also in 2013, we significantly improved the capabilities and debt that’s out within our organization. Specific is the expansion of our sales force, on an estimated basis we grew the capability and stamped within all of our infrastructure support and function such as reimbursement, medical affairs, information technology, financial accounting, human resources, regulatory affairs and quality assurance, restructure development and operations.
During the year, we presented a seven highly recognized investor conference and secured coverage from three additional analysts bringing the, that are covering the company. We fulfill our strategy of securing a listing on NASDAQ. This milestone sealed our goal of bonding our exposure to the investment community and increasing the trading volume in our stock. Further we attained -- in that goal was our inclusion in the Russell 2000 and the Russell Global Indexes.
Our December secondary offering for $36 million was one of the most successful offerings that I’ve ever anticipated in. I’ve always seen about 10 offerings over the years and this one was by far very successful, or the most successful. The offering was more than five times all subscribed. We lobby to extensively provide a wealth of detailed analytics to CMS and support to their hospital outpacing perspective payment system. Pricing related to package the reimbursement for certain products used in advanced wound care with the related surgical procedure.
Our efforts were also gratified by the extended pass through status through 2014 at EpiFix allograft was granted. This major EpiFix will retain the current payment methodology for one more year. However, in 2015 will still maintain all the other advantages relating to our pricing so as appropriate graph and of course the quality of our clinical outcomes. We believe that the CMS file the wound packaging stem cells were providing a great opportunity for MiMedx than we’ve previously anticipated due to the peer pricing contained in the final rule and the pass through status of EpiFix in 2014. This is the reason we accelerated expansion of our sales force Bill Taylor is going to elaborate on that and some details in few minutes.
In addition, the gain and the right decision of CMS, we became a very capable organization in marshalling all of our resources needed to get conventional support for this and other decisions that maybe needed in the future. We’ll continue to champion (Ph) the elimination of wastage that has been ramped up with certain stem cells tubes MiMedx has become a leader within our sector of healthcare on this particular matter.
We received the Medicare Q code for EpiFix grafts on January 1, 2013. Since MAC’s generally do not reimburse products in this category we had additional published clinical data to support the [indiscernible], we put forth a plan to secure approvals and produce a large body of clinical studies. With the excellent results from our clinical studies, we had success so we had secured the reimbursement from six of the eight MACs by the end of the year getting us access to 86% of Medicare beneficiaries. In February, we added the seventh MAC and at present we have coverage of 49 to 50 states with only Florida remaining. We hope to have that MAC coverage shortly.
Right in 2012, we bought our reimbursement call center in house to gain better control and impact on our approvals. Throughout 2013 we expanded reimbursement team with additional professionals and health policy and reimbursement. Our build-out of internal reimbursement expertise is essential strategic element to achieve our pre-penetration of reimbursement coverage from the commercial payers. Our growth expectations for 2014 are highly dependent upon the fulfillment of our reimbursement strategies. However, we’re very confident in that taking place.
Our PURION process allograft was a subject of many studies and aspects this year the collected body of work resulting from these studies is quite compelling. On the miracle timing from our work is the stem cell magnet packs in our allograft which revitalizes tissue regeneration. This was disclosed in the publication in August that was done at Stanford Medical University Center and the Georgia Biotechnology Center.
During 2013, management made a strategic decision to accelerate the build out of our sales force, expand the rate of clinical studies and greater protection of our intellectual property and increase our legislative presence and relationships. All these strategic initiatives made the impact of achieving our adjusted EBITDA goal for the year they will continue to pay significant dividends in the longer term for the growth of company and were in the best interest of increasing shareholder value. Also during 2013, our market cap more than doubled.
Now let me provide some inside into 2014, and beyond. It should be evident with the number of sales personnel’s that we have added that we are optimistic about our penetration of the advanced wound care market this year. We have the most effective technology both clinically and cost wise, two shares has both major logistics advantages to all the major competitors that product that require cryogenic shipping, storing and flooring processes. We have significant reimbursement advantages due to our work during the last two years. We’ve a culture of success and the culture of integrity, both of those with long way in producing continuing results therefore expected by end of this year 2014 there should be no question at all as to who the new leader relative to advanced wound care sector of healthcare is.
Our realized this transition has taken place in a very short period of time but the majority of success factors were orchestrated as a result of our efforts, the others staying in result of the business from stakes of others. Either way, the business from the stakes of others either way we’ll take the environment we’re in and exploring our advantages and what we’re up will predict to be fairly dramatic traction for us this year. We will continue to announce results of our scientific and clinical studies. We’ve had a lot of studies underway for quite some time and those results will be forthcoming shortly.
We should continue get on successes on the reimbursement side and in fact that is a most difficult of all demonstrations we deal with. It is difficult because it is large wide disperse single project graded expansion expertise to deal with and I think our performance [indiscernible] here demonstrates we have that expertise and experience. With our quarter revenue increases we will begin to show a growth of EBITDA as a percent of revenue, that will be followed by a reduction of operating losses that where we should be producing operating profits. Our cash flow should be neutral to positive very positive as the year unfolds.
As I mentioned at the end of the year, there should be no doubt as to who is the leader in advanced wound care sector of healthcare. From that point, we must continue to export our technology for other large opportunities. We will have announcements in the months ahead as new initiatives that will be beneficial. We’ll begin to announce progress through our license with Medtronic. We express numerous talents and our technology has so many opportunities that we must find very effective partners to help us with the distribution opportunities. I expect those will show themselves as the year unfolds.
I think you can tell in the press release yesterday that PURION process, Amnion Membrane Tissue has some exciting opportunities for use with Osteoarthritis. Again that is just one of the opportunities we have but it will take many years for us to bring that technology through a BLA process and into the marketplace. As we mentioned in our press release that was one of the product opportunities, ready to discuss with the FDA relative to the regulatory pathway when we receive their untitled letter.
Also during 2014, I expect you to begin to hear and see more news about our other observations trying to emulate in MiMedx and our technology. Bill Taylor will discuss in more detail about it our patents in a few minutes, but it’s suffice to say that our patents cover the multi-layer grass, which is the most effective grass that are grown clinically and otherwise. Some singular grass have entered the market and they’re effecting is relative to our grass is very limited.
Also please recognize that we should welcome competitors who have EpiFix integrity and business acumen, so they approach this new technology in the right fashion. On the other hand no one should -- competition, competitors are going to do a service to a great promising new technology.
Now relative to 2015 and beyond, I believe I you will see as well as establishing advanced wound care by the end of this year. As we enter 2015 you will see us demonstrating a presence relative to burns and sell a lot of promising areas of healthcare which I will not discuss at this time due to competitive reasons. However, surprised to say that we should be very well establish EpiFix and wound care at the end of this year, as we move into 2015 and beyond you will see EpiFix being developed for several different and promising market areas related to surgical procedures and sports medicine.
In summary we continue to feel very strong as company has some wonderful opportunities that are existing, technology. We have the right management team in the place and right time to explore these opportunities, and what should be a very optimal fashion. I’ll turn it over to Bill Taylor now. Bill.
Thanks Pete. This past year was very strong with an amazing number of first and overall outstanding performances for the MiMedx Organization. I would like to thank and congratulate our entire organization for and outstanding 2013 and I would also like to thank all of our shareholders for their confidence in our team. I will first discuss our revenue and the associated growth of our field sales organization.
As Pete mentioned our revenue for the year was $59.2 million, just shy of the upper end of our full year range. And recall at the beginning of the year last year we projected $50 million to $60 million range and we’re just $800,000 away from exceeding the upper end of that range, and more than doubled our revenue from year-to-year and our fourth quarter revenue was more than 70% overall fourth quarter 2012. Even with the government shut down in the fourth quarter and typical fourth quarter VA seasonality.
Our VA business was more mature today than our commercial business, so its seasonality is more visible as you would expect. The substantial growth of our sales organization from 33 people to 76 sales professionals during the year drove this phenomenal growth, because of the very favorable new CMS reimbursement situation, the availability of seasoned wound care sale talent, we significantly accelerated our hiring profits this year, we essentially hired the full years budgeted sales headcount in the first two months of this year. So we call that late last year after the final was announced and during our offering, we projected the massive sea change in reimbursement would take probably six or eight weeks into 2014 to be fully digested by clinics and physicians.
We had a very strong education program that started in December and is just now winding down. And let me project in the beginning in March through the rest of the year sales respond and accelerate dramatically. So far our prediction has proven to be right on track. So keep some time to educate the centers and eliminate the confusion due to the payment methodology changes, that builds investments in the reimbursement education have just now starting to pay off.
So with this new reimbursement scenario is mind, we accelerated our direct sales force hiring this year. We have added another 34 sales professionals bringing our total today to 110 and we expect another 5 to 10 by the end of March. So almost all these new hires have chronic wound care experience and we expect them to ramp sales relatively quickly.
Our national sales meeting was early last week and I must say that was a great deal difference in the year before. And it is a very intense four day session and the group came out of the meeting very, very energized. One item of note regarding our sales force is that we no longer separate our sales team into the federal versus commercial teams. You may recall from our last shareholder call in the fourth quarter, we combined our regional and national management teams into one management team rather than one for federal and for commercial sales.
We have now completed this integration and just have one direct sales force. We still have some sales executives who are nearly 100% federal, who are 100% commercial but this new structure allows the more territory efficiencies and less travel time and expenses. In terms of sales team growth for the rest of the year, we will likely take a little bit of a breather in our hiring process, while we gain some momentum with all these new hires. We are still working on our updated estimates for the balance of the year but at this point, I would estimate that we will continue to grow our sales organization such as we reach somewhere between a 130 and 150 sales professionals by the end of the year. At the National Sales Meeting, we also discussed numerous clinical study results with the special focus on our second published clinical trial using EpiFix on diabetic foot ulcers.
This was published; we did a press release on this yesterday, the 40 patient study that was published in the International Wound Journal and look at weekly versus biweekly applications of EpiFix on Hard to Heal Wounds. All potential participants were treated for four weeks with conservative therapy and those patients who met the inclusion criteria then which was essentially the same as the first EpiFix and also the published general graft study we enrolled in a two week running period. At the conclusion of that running period, patients with wounds reduced in size by more than 20% were excluded from the study. This ensured that there were no easy to heal wounds that will be included in the study.
The bottom line of this study is that it confirmed a very strong clinical efficacy of EpiFix when used in treatment in diabetic foot ulcers with over 90% of those hard to heal wounds healed in 12 weeks and 84% in six weeks. It also showed that weekly applications can, on average can heal the wounds over 40% faster than biweekly applications. And the medium time to closure here for weekly EpiFix applications was two weeks and for biweekly applications it was three weeks, that was the medium closure. Now in addition to that study, we are nearing completion of our first multi-center randomized control trial for venous leg ulcers.
This is a 90 patient study and it had favorable results at its interim time point and we expect to complete it and submit it for publication in early in the second quarter. Additional studies of diabetic foot ulcers and venous leg ulcers are also enrolling; I expect that we will be able to report those results later in the year. I would like to mention one more thing on hard to heal wounds, not only with the first two published EpiFix diabetic foot ulcer studies focused on hard to heal wounds but these are the subject of more than a dozen posters and abstracts highlighting EpiFix that was presented at various conferences over the past few years.
We consistently hear from clinicians that EpiFix is the best product they have used on hard to heal wounds. On top of our published diabetic foot ulcer trials we also have case study after case study of wounds that were treated by advanced new therapy such as living cell treatments over the course of month and in some cases years with no appreciable closure to the wounds. And after a month or two or three of using EpiFix the wound is closed. One example that was presented in September of 2013 at the Symposium on Advanced Wound Care, the SAWC, a chronic five outlier unfold wounds that have been present for an average on those patients of 5.5 years. These wounds had each previously been unsuccessfully treated with various modalities including multiple applications of living cell skin substitutes.
Once treated with EpiFix, these extremely hard to heal wounds fully close in an average of 13.5 weeks, that’s about three months that’s after five years of being open on average. Now the question is do you need living cell to close a chronic wound? The very simple answer is no, not when EpiFix is used. So, if you ever hear of anybody claiming that EpiFix doesn’t work on hard to heal wounds, please know that whoever is telling you that either hasn’t taken a time to review the available data or they have another agenda. Changing subject to our building move, I am happy to announce that we finished all of our qualifications and validations and began tissue processing in this new facility in Marietta in January. The associated qualifications and validation cost in the fourth quarter of last year did slightly affect our gross margins as Michael discussed, but we are in and operating normally now.
We have retained our own facility and at an excess capacity, disaster recovery location but that said it’s very nice to finally be able to have all of our people under one roof now. And both facilities during those two major ice storms here in the early in year with no issues. Changing the subject to patents, we started off 2013 having one issued and then we were granted eight new patents during 2013, that brings us to nine dehydrated human amnion/chorion membrane based U.S. patents at the end of 2013, since then two more this year. We have almost 50 amnion patents submissions are on the various stages of review by the Patent Office.
So, we are being extremely diligent about the protection of this AmnioFix and EpiFix intellectual property and we think that our patent counsel is one of the best in the country and we are very well prepared to address, to prevent and to defend potential infringement on competing products on this intellectual property. Now I am sure many of you are wondering about our relationship with Medtronic and of course we can’t talk about the details because of confidentiality but what I can say is that we expect our first small stocking order this quarter for what will be a limited launch for them and then a few more after that into the second quarter we will expect in a full stock mode which support their full launch. As that relationship unfold we will I am sure have more information to discuss.
I also want to discuss one of the other press releases from yesterday. As we reported in one of our new products in development using our micronized dHACM, dehydrated human amniotic membrane tissue was featured in a study published in Arthritis Research & Therapy. And that in turn was highlighted in one of the major journals. As you recall this is a first development project that we started a few years ago that will need a different regulatory pathway most likely a BLA.
And as you continue to that publication the results look very promising and could play a very significant role in reducing the impact of  arthritis help people return to normal or near normal functions. Hopefully this is a very-very large opportunity for MiMedx down the road. Of all the accomplishments over the past year I’d say probably the most exciting near term is the addition of such a large group of seasoned sales professionals. With our number now at 110 and soon it’d be over 120 in the organization I really look forward to seeing how organization and our revenue develops over the course of this year. If we execute as I expect we will, we would have a number of great things to report this year as weeks and months progress.
So with that I will turn it back over to Pete.
Bill, thank you. Okay, it’s Mike Senken’s turn. Mike?
Thanks Pete. The company reported revenues for the fourth quarter of approximately $18 million, an increase of 71% of $7.5 million over prior year fourth quarter revenue of $10.5 million. As a percentage of total quarterly revenue, wound care revenue represented 58%, surgical and sports medicine 38% and other 4% of reported revenue.
In comparison to the fourth quarter 2012, wound care revenue grew 103% and surgical and sports medicine revenue grew 49%. Commercial revenue for the quarter was 51% of total revenue as compared to 42% in Q3 with the growth in commercial revenue being driven by the continued build out of our sales force in territories where we have MAC coverage. Sales to government accounts were down slightly as compared to the third quarter due in part to the government shutdown as well as normal seasonality and investor’s conference which traditionally occurs in November.
In Q4 we added several new government facilities as we continue to expand our sales force. As compared to Q4 of 2012, commercial revenue grew 103% and government revenue grew 47%. As stated previously, we would expect the percentage of revenue from commercial accounts to continue to grow each quarter as we gain market share and what is the larger segment of the overall wound care market.
Revenue for the 12 months ended December 31, 2013 increased $119% to approximately $59.2 million as compared to $27.1 million for the same period in 2012. Wound care revenue increased 190% while surgical and sports medicine revenue increased 79% when compared to prior year. Sales to government accounts increased 207% as compared to prior year recognizing that we only began selling direct into government accounts in the third quarter of 2012. Sales to non-government accounts have increased over 59% as compared to prior year.
Gross margins for the quarter were 83% as compared to 84% in the fourth quarter 2012. We anticipate that margins will continue to fluctuate in the lower than 80% range on a quarterly basis in 2014 depending upon demand in any given quarter. For the 12 months ended December 31, 2013, gross margins were 84% as compared to 81% for the 12 months ended December 31, 2012. The improvement was driven by favorable products and customer mix.
R&D expenses for the quarter were approximately $1.4 million or 8% of quarterly revenue, which represents an increase of 22% as compared to prior year. On a year to date basis R&D spending was approximately $4.9 million as compared to $2.9 million in 2012.The increase in R&D spending is driven primarily by increased investments in clinical trial.
Selling, general and administrative expenses was approximately $14.3 million for the quarter and $46.2 million year to date. The increase in spending reflects the continued build out of our direct sales force. In the fourth quarter the company added eight new direct sales associates.
The company reported positive adjusted EBTIDA of approximately $1.3 million for the quarter ended December 31, 2013, which is a $900,000 improvement as compared to an adjusted EBITDA of $432,000 in the fourth quarter of 2012. Year to date adjusted EBITDA increased 128% to $5.5 million as compared to $2.4 million in 2012. Year over year improvement in adjusted EBITDA is a result of higher sales volume and improved gross margins.
The net loss for the fourth quarter was approximately $1.4 million, as compared to the reported net loss of $1.6 million for the quarter ended December 31, 2012. It should be noted that the 2013 fourth quarter net loss includes an impairment charge of approximately $369,000 related to the HydroFix platform that was discontinued in the quarter.
The net loss for the 12 months ended December 31, 2013 was approximately $4.1 million a loss of $0.04 per diluted common share as compared to a net loss of $7.7 million or $0.09 per diluted common share in 2012.
Now turning to the balance sheet, the company reported approximately $65.4 million in total current assets, an increase of approximately $47.3 million as compared to 18.1 million as of December 31, 2012. The increase includes 37.3 million in cash on hands, 8.4 million in accounts receivable, $900,000 in inventory, $700,000 in prepaid expenses. Property and equipment increased by approximately $3 million in 2013 due primarily to investments at our new facility to expand production capacity and build out our IT infrastructure.
The company reported a $11.1 million in total liabilities, which represents a decrease of $4.1 million as compared to the balance as of December 31, 2012 of $15.2 million. The reduction was due primarily to the payment of the earn-out and the conversion of the senior secured promissory notes earlier in the year, somewhat offset by increases in normal operating liabilities.
Turning now to the statement of cash flow. The company reported positive cash flow from operating activities of approximately $840,000 for the quarter. For the year, net cash used in operating activities was approximately $285,000, an improvement of $3.1 million as compared to prior year. Cash used in investing activities included capital expenditures and patent application costs of approximately $491,000 for the quarter and $3 million for the year.
Cash flows from financing activities for the quarter were approximately $37.7 million, including $36.6 million from the follow on offering that closed in December, $465,000 from the exercise of stock options and $628,000 from the exercise of warrants. On a year-to-date basis, proceeds from the exercise of stock options and the exercise of warrants were approximately $2 million and $2.1 million respectively. The company did not draw down on its working capital line of credit during the quarter.
Total stockholders’ equity increased by $53.6 million to $73.6 million as compared to $20 million as of the end of the prior year. There were approximately 104.4 million shares of common stock, 123 million warrants and 15.4 million stock options outstanding as of December 31, 2013. Also we added a total of 56 associates in 2013 and ended the year with a total headcount of 226.
And one final note, the company will be presenting at the 9th Annual Canaccord Conference on Tuesday, March 11th in New Orleans. The day prior to the opening day of the American academy of orthopedic surgeons’ annual meeting. Please refer to the investor section of our website to access the webcast of the conference.
With that I will turn the call back over to Pete.
Thank you Mike. Let me make a couple of other comments before we open it up for questions and answers. First we’re sorry for the volatility in our shares; we discussed that at our Board meeting yesterday. But I want to point out that’s just part of being a high profile growth company. This should dissipate as we build our institutional shareholder base. Our individual shareholder seem to be more impressionable about some of these things that have come out on the blogs.
Companies with similar market caps and trading volume like MiMedx are in the sweet spot for short sellers that’s just the way it is. Smaller companies because of lack of trading volume of lot of the sweet spot, larger companies because of almost all institutional investors are not in the sweet spot, we’re. As I previously said we’re allowing the company’s information rather than blogs, and we’re held very, very accountable for information we put out and information we disseminate, and we’ll continue to try to be extremely accurate as we have them with that information, the bloggers are not.
Let’s go ahead and open the call up for questions and answers.
(Operator Instructions). Your first question comes from the line of Matthew Hewitt, Craig-Hallum Capital Group. Please proceed.
Matthew Hewitt - Craig-Hallum
Congratulations on the strong 2013. First one I am looking at your guidance obviously you reiterated the full year. Q1 though appears a bit light, I guess what I was anticipating, maybe walk through some of the dynamics you have been experiencing post of bundle news from CMS, what the doctors, how they reacted to that news? And what that means as this year progresses?
Let me start with couple of comments and then Bill and Mike can jam in here. First of all, we’ve had a two-year track record now of excellent forecasting relative to our quarterly revenues and EBITDA. We’ve been more accurate I think the most management team and most management teams don’t even put out forecast. So number one, we’ve been wisely cautious on first quarter due to the new CMS payment changes. We’re in the marketplace. We know exactly I think what’s going on with the 1500 plus wound care centers around the country, the back office activity associated with the people try to come up to speed on this new very reimbursement procedure. It takes time and there is momentum that’s going to have to build here.
We think in the first 60 days we started this in December terms of education process. We’ve made great progress but some of these variables, we do not control. But we’ve been very active with the management groups of some of these consolidated wound care centers. We have been very active with the field management in terms of education process. So we’re cautious and we’ll try to remain caution as we give you any forecast in the future. So if there is a bit of angst over the fact that these numbers look like our growth rate is slowing down that’s just not the case. We’re just doing the normal thing that a management team prudently should do with such a major change that has taken place in the industry. We’ve got all activities that we needed to do in order to export our advantages and believe me we will explore those.
And now I will add to that, Matt, as I am sure you know when there is a major change in reimbursement in the healthcare industry typically they take some time to educate and we have predicated this late last year after this final rule happened around Thanksgiving is that, it was going to be our job to educate people because they had been used to do this same payment structure for about 5 or 6 years, straight there is no major changes to it maybe even longer than that. So we had expected that it was going to take into the first quarter to really thoroughly educate everybody and we’ve done that. And the reaction generally speaking has been, wow that’s great. I need to switch over to EpiFix, but we need to verify that what you’re telling is true. And that’s exactly what they’ve done and now we’re seeing the momentum pick up where that confusion of the massive change is gone away.
Our reimbursement team has done an excellent job getting out into the field explaining these large wound care centers that what the changes are like and what it means for them and what products. We’ve had a number of facilities when they understood it, they said okay EpiFix is going to be our grow to product and we’re not likely use anything else or we’ll use some other things very sparingly. They’ve taken a couple of our big competitors of which keeping out and that’s been a routine finding over the last several weeks. The last thing I’ll mention is of course the weather has been a little bit challenging a lot of vary to the country, little bit more so than usual that also has a little bit of effect in this quarter. So we have those two things together and then what Pete mentioned, we don’t like to give numbers that we can’t achieve, so we’re reasonably conservative.
I think if I could just put an exclamation point of what Pete and Bill added which is, we’ve added over 30 people in the first 45 days of the New Year. If we had any concerns about the reimbursement environment and what the impact was going to be to this business and also guidance, we certainly wouldn’t pull the trigger on that number that’s a huge increase in a very short period of time.
Just do the math it’s 50% increase on where we were in December, that’s a lot to swallow in six weeks.
The other issue here is the wastage factor which we here talking about throughout this industry since last summer. In interview in some of our competitors sales people which most of whom we hired, they all said to us we’re really tired if walking into our accounts meaning old accounts and hearing about wastage factor. It was a bad symptom and they were able to make exclusive for us and it devastated them. So there is no issue about momentum. Here is an issue about centers coming up and been able to do their billing and be comfortable with that. And to some extent as these centers flip over, if they got hospital associated whether they’ll be some value committee process to go through, but believe me the momentum is with us and you will see it appropriately.
Matthew Hewitt - Craig-Hallum
Thank you for the detailed responses. Maybe one more for you Pete and then I’ll jump back into queue. You are champion of the reimbursement side of this obviously working with the MACs and the commercial providers. You’ve made steady progress on both fronts. How soon can we anticipate that you’re going to get this last MAC I mean is that something you think can happen here even before this quarter ends or at least in the first half end? Secondly on the commercial side, do you have a number obviously the addition of the Blue Cross Blue Shield contract is nice but what has been total number of commercial lives covers today?
Okay, Matt. First of all on First Coast that’s the one remaining MAC in Florida there always seemed to be not just in this area but in other areas, the last to respond. We are in discussions with them and that’s all I really want to say. I’ll just say we are in intimate discussion with them. So we’ll go from there.
Now on the reimbursement front, fortunately or unfortunately because of my tenure in the industry, 47 years; I have been involved with health plans for the majority of that period of time. I know a lot of people. I’m experienced more than anybody can even imagine and worked with few reimbursement, progress new technologies that have come to the market through our company. Dr. Don Fedoroff was saying, Don was with Highmark Blue Cross Blue Shield for 12 years. He was the Chief Medical Officer when I hired him well eight years ago, just coming to make your health care. Don’s reputation in the industry is stellar. We know a lot of people. We perform properly for these health plans in the past. There has been an attitude from the medical directors of these health plans about getting substitutes. We didn’t develop that attitude. A lot of competitors, previous competitors being; we’re in the process of changing that.
So I feel like as we make progress here and in the months ahead, I will pretty much put the MAC issue behind us. Now it’s on the other health plans. The large Blue Cross Blue Shield plan that just gave us coverage, it is a good indication of what should begin to play out through the Blue Cross Blue Shield organization. Then we got the signals, the atmos, the well points et cetera those were deployed and we were very busy working on those right now, and frankly we have been. It is not something we just started. It’s a laborious process. It’s a detailed process. I think we’ll get through this fast than anybody else could and I’m telling you it is a momentous task. It’s not something we have taken lightly.
So I hope by the middle of this year, I’ll just make this prediction. In the middle of this year we’ll have the majority of the large health plans reimbursing for our EpiFix. And as the rest of the year plays out, we should clear those hurdles. Because the studies we’ve already got in place, the studies that's close to be published, maybe very shortly; a very compelling data and information that suites where you need the health plan medical director to reimburse. And the cost savings associated with our graphs that will save huge amounts of money compared to what they were doing with the two competitive products that had been on the market for about 10 years. So I am very optimistic about what we’re doing, but it is something I’ll work on every day, and I’m looking forward to the day that I can work on some other things. But reimbursement is the very key to a company like ours, our future.
Matthew Hewitt - Craig-Hallum
All right, thanks for the feedback there. I will jump back in the queue.
Our next question comes from the line of Will Plovanic with Canaccord; please proceed.
William Plovanic - Canaccord Genuity
I apologize for the background noise, I’m travelling. Couple of questions here, just I’m going to get a little specific, one, your sports medicine was very strong in the quarter, just curious what specifically is driving that business?
That surgical and Sports Medicine, just to be clear which is, both our [indiscernible] membrane and the EpiFix business as well as our micronized business, or at least a portion of our micronized business we do have some EpiFix micronized as well, but would Mike go in there? He need the numbers there.
Well, we have distributors that are primarily focused on the spine business and we recorded a large order in the fourth quarter related to that.
Yes, you can imagine all those surgical procedures that would require the membrane. Typically from a seasonality perspective, the fourth quarter is a big quarter for them. Because people have used up their insurance co pays and deductibles and so forth so, usually are quite busy so that’s been a trend for us on the surgical side where we tend to have some pretty big numbers in the fourth quarter.
And again that’s one of the reasons why margins were a little bit down in the fourth quarter because as we said in the prepared remarks we had higher shipment to some of these distributors.
William Plovanic - Canaccord Genuity
Okay than a clarification, any ways to quantify that? And then my next question is, given the Q4 results were there any hospitals or wound centers that were trying to burn through any existing inventories in the fourth quarter or may be potentially in the first quarter added to these reimbursement changes, or for the wound care they’re just not seeing on inventories?
Yes, on the wound care side, on that last question, we did hear that some of the facilities that had inventory, that they wanted to clear too before those newer reimbursement issues with them in the following year. Now, how much of that was out there, it’s hard to say, but we had heard of some circumstances like that.
Just in terms of numbers, to be clear surgical sports medicine revenue in the third quarter was 6.1 million, and it was 6.9 million in the fourth quarter, so an $ 800,000 increase. Wound care revenue was 9.2 million in the third quarter and 10.3 million in the fourth quarter.
William Plovanic - Canaccord Genuity
Okay and that the last question I will as is just if you could, actually I have two more, I apologize. One, how long do you expect these new sales reps to ramp given that there tenure, when can we start to see their contribution in the numbers? And then the last question I have is just, I know you had something in your prepared remarks with negotiations with the FDA over the trials for the micronized products. But just any timing, where we can look forward to and we get more clarity there, that’s all I have, thank you very much.
All right, on FDA there’s nothing really changed from probably information we previously disseminated, we’ve got a meeting scheduled in early March, I forget whether we’ve exactly announced the date, that’s our first IND, pre IND meeting with them, we expect another meeting within the next 30-45 days after that and then we’ll get into the BLA process after those two meetings but those two meetings are pre meetings for the BLA process and when those two meeting are completed we’ll be in a position hopefully to discuss with the FDA our proposal to continue to market to a transition agreement. So I guess again the timing that we previously discussed is to impact probably something in the May. May timeframe we’ll have more information for shareholders on that subject.
And Bill, can you repeat that first question too real quick.
William Plovanic - Canaccord Genuity
Just with the new sales reps you’re adding tenured reps, I mean long do you expect it to take them to ramp, when can we see this in the numbers do you think?
Yes, as you recall, typically we’ve used about a six month ramp rate to get up to $85,000 a month which is a million dollars a year run rate. I think we’re going to have a, that should be a very solid number and as a matter of fact I think some of the folks should be able to beat that. The only issue we’re going to have, it’s not really an issue it’s just the timing is when you have to get into a value analysis committees and so forth. Fortunately with the change in CMS I think that’s shepherding a little quicker response to these committees, so I do think that we’ve got a shot at on average a little better than that six months. So we seem to be getting some pretty good uptake just in the first few weeks of the new folks jumping in. So we’ve got a shot at maybe speeding that down by a month or month and a half.
The value analysis committees will be, very up to speed on what wastage means and the use of these previous products versus our products so we hope to see those come back, committees to move quickly.
Our next question comes from the line of Bruce Jackson - Lake Street Capital Markets, please proceed.
Bruce Jackson - Lake Street Capital Markets
So, if we could just take a closer look at the guidance for 2014. How should we think about the quarter to quarter progression as the year unfolds, would you expect sort of a like a step up in Q2 and then a gradual rise or it’d be just gradual throughout the year. Just help us out with how you see the year unfolding from a revenue standpoint.
This is Pete, I think you’ll see a major step up from first quarter, second quarter and then escalating step ups from that point forward. There is tremendous momentum out there, I can assure you. If not this management team would not have made the decisions we made to bring as many people on as we have. So it’s a case of getting through these VAT committees and our people that we’ve hired generally all experienced, they know the product areas well, they know all the physicians and room centers well, so things will develop very quickly once they start.
Yes, already, I think you’re going to see that a sizeable step in the second quarter and then if you think about it, with all these new folks that we have online they’ll still have some moving to step up into the third quarter as well and then if we add another 20-30 people as we expect that we’re going to, 20-40 people we’ll get the continued build of that, the new element of the sales force. I think we’ve got pretty good coverage on the country right now, the only exception to that is, is Florida, since we don’t have first place yet, but even with that as we continue to add sales reps we wanted more, more condensed and more dense, we’ll have less wind chill time and they driving from account to account and have better and deeper penetration in the states we’re in, so I think you’re going to see some sizeable increases from quarter to quarter, each quarter through the year.
Bruce Jackson - Lake Street Capital Markets
Okay, great and then turning to the new product pipeline, can you just tell us what the priorities are in terms of the BLA products, which ones you’re going to go after first.
I don’t think we’ve really disclosed that information. So let us make this commitment to you Bruce, we’ll give some insight here next couple of weeks because we’ll be with the FDA, it’s probably prudent for us to put our press release describing what that\ visits entails and in that press release we’ll give some descriptions on exactly which of the, there’s going to be more than one BLA which is first initiative involves and then we’ll give some insight into what our second initiative involves, I think it’s best to let us do that in a professional way with a press release and we’ll do it wrapped out around our FDA visit, how about that.
(Operator Instructions) Your next question comes from the line of Suraj Kalia, Northland Securities, please proceed.
Suraj Kalia - Northland Capital Markets
Good morning gentlemen. So Pete, I guess or for Bill, all the sales reps that have been hired, are they more relationships on the commercial side or the VA side.
The vast majority of them are from the commercial side. A few of them may still have some good strong VA relationships, but I would say 95%, 90% of them, or something like that are focused on the commercial interest side.
Suraj Kalia - Northland Capital Markets
Fair enough, and Bill just to follow up on the same question and I’ll keep this my last question. For these, you know you’re press release states that commercial sales in fiscal ’14 are going to be at least if I remember correctly going to be higher, at least you’re alluding the proportion of commercial sales is going to increase, am I correct in assessing that you all are just trying to shield yourself from the collateral damage of Shire and what’s going on in that front, hence you all are beefing up on the commercial side. Is that a safe way to look at that.
Not really, we’ve always since well before Shire imploded, we’ve always had this focus on wound care and commercial wound care so that’s been our plan two-four years so what’s happened with the issues in the market place, we’ve been able to accelerate that but it’s always been in the plan to move forward as we’ve stated.
Let me add this, we went after obviously VAs initially because there weren’t any reimbursement questions there, and the reason our products swept through the Vas very rapidly is because there’s clinical effect seen and its cost effectiveness. So that’s a microcosm of what’s going to happen on the commercial side, commercial side we have these reimbursement issues to settle and we’ve settled those now, as I say I think that the MACs are pretty much behind us. We’d be working four-six months this year very diligently on bringing the other commercial health plans, private health plans on, and that will again just add continued momentum to the commercial piece.
And as we said before when AVH Shire was up at the $200 million a year run rate, roughly a quarter of their business was government or VA business and three quarters of it was commercial, and we fully expected, have expected that our business would evolve into that kind of a ratio, maybe even more over time where it’s more in the commercial side because we have so many opportunities on the surgical side, and your fixed product line.
Suraj Kalia - Northland Capital Markets
Fair enough, gentlemen thank you for taking my questions.
Next we have a follow up question from the line of Matt Hewitt, Craig Hallum Capital Group, please proceed.
Matt Hewitt - Craig Hallum Capital Group
Just two follow ups from me, first and I’m sorry if you disclosed this, I missed it, the HydroFix contribution either in Q4 or for 2013.
The total revenue for HydroFix in 2013 was roughly $450,000 and in the fourth quarter it was roughly a $150,000.
Matt Hewitt - Craig Hallum Capital Group
Okay, thank you, and then, lastly here, I think you previously discussed that the BLA process the trials associated with those application would likely start to impact the back half of the year, you’d kind of ball parked it around 3-5 million, is that still how we should be thinking about for our models.
I would certainly wait till four quarters start ramping any of that up, based on the timing we understand now and I think that’s a reasonable figure and again, I think what we’ll do when we put out a press release describing our forthcoming meeting, or after the meeting with FDA we’ll give more insights into that.
Matt Hewitt - Craig Hallum Capital Group
Okay, great, thank you very much.
Any other questions. Okay, well I thank you very-very -- Go ahead operator.
There are no further questions in the queue.
Okay, well I thank you very-very much for being on the calk, we’ll be with you in about another 60 days reporting first quarter and as I’ve always said, if there’s anything that changes with the way we have produced our outlooks and forecast we will let you know. That’s been the way we’ve run our disclosures over the decades and if there’s any issues that are going to develop that are different from the summary presented to you then we will certainly let you know. So thank you very much and I appreciate your support and your interest in the company.
Ladies and gentlemen that concludes today’s conference, thank you for your participation you may now disconnect, have a great day.
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