Alliqua BioMedical's (ALQA) CEO David Johnson on Q2 2016 Results - Earnings Call Transcript

| About: Alliqua BioMedical, (ALQA)

Alliqua BioMedical, Inc. (NASDAQ:ALQA)

Q2 2016 Earnings Conference Call

August 09, 2016 08:00 AM ET

Executive

Dave Johnson - CEO

Brian Posner - CFO

Nino Pionati - Chief Strategy and Marketing Officer

Brad Barton - COO

Janice Smiell - CMO

Analyst

Matt Hewitt - Craig-Hallum

Glenn Novarro - RBC Capital Markets

Josh Jennings - Cowen and Company

Suraj Kalia - Northland Securities

Swayampakula Ramakanth - H.C. Wainwright

Keay Nakae - Chardan Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter of Fiscal Year 2016 Earnings Conference Call for Alliqua BioMedical Incorporated. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question-and-answer session. Please note that this conference is being recorded and that the recording will be available on the company's website for replay shortly.

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that can cause actual results to differ materially from those indicated, including those identified in the risks factors section of our most recent Annual Report on Form 10-K filed with the SEC and our most recent 10-Q filings with the SEC. As such, factors may be updated from time-to-time in our filings with the SEC which are available on our website.

We undertake no obligation to publically update or revise our forward-looking statements as a result of new information, future events or otherwise. This call will also include a discussion of several financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these non-GAAP financial measures. The company defines non-GAAP net loss from continuing operations as its reported net loss GAAP excluding income tax expense and benefit and stock compensation expense, one-time charges and other non-reoccurring operation cost and expenses and tangible asset amortization, change in fair value of consideration, change in value of warrants, liability and loss from discontinued operations, reconsideration of the most direct comparable GAAP financial measures, can be found in this afternoon’s earnings press release.

I would now like to turn the call over to Mr. Dave Johnson, the company's Chief Executive Officer.

Dave Johnson

Thank you Operator, and hi everyone and good morning. That was a mouthful operator, that was a long introduction. But welcome to Alliqua’s second quarter of fiscal year 2016 earnings call. With me today in our Yardley office is our Chief Financial Officer, Brian Posner; our Chief Strategy and Marketing Officer, Nino Pionati; our COO, Brad Barton; and of course our Chief Medical Officer, Janice Smiell.

Before we start with today’s call, lets walk through a brief agenda. First, I’m going to begin with a high level over view of our financial performance during the second quarter, along with some commentary on our operating progress and some other highlights that have happened during the quarter.

Then I will turn the call over to Brian, who’ll walk you through a more detailed review of our second quarter financial results and provide you with an overview of our annual revenue guidance for 2016 fiscal year. And then following the review, I’ll be back to provide you with an update on our strategy to drive sales of our primary products and build on our portfolio of regenerative healing technologies, and of course then we’ll open it up for some Q&A.

So with that let me begin with a summary of our quarterly financial performance. During the second quarter of 2016, our total revenue was $5.5 million, up 75% year-over-year compared to revenue of $3.1 million in the second quarter of 2015. Now we reported total revenue and importantly from continuing operations of $4.5 million, representing 80% growth year-over-year.

Our total revenue from continuing operations excluded approximately $1 million of sales from products in our Sorbion franchise, which as I will discuss in further detail, later in my prepared remarks, we recently sold to BSN Medical. Our total revenue growth from continuing operations was driven by strong sales of our advanced wound care products, which increased 82% year-over-year, along with strong sales of our contract manufacturing products which increased 67% year-over-year.

Overall, we are very pleased with our total revenue performance during the second quarter in our major products, as well as our contract manufacturing business. Now, in order to give you a better idea of some of the headwinds and tailwinds in the quarter, let me provide you with an overview of our sales performance in some of our major products.

As a reminder, the growth rates I will discuss on this quarters’ call are on a pro forma basis, which assume that we owned acceleration for the full quarterly periods of 2015 and 2016, and removes the Sorbion revenue from both periods as well, which we honestly believe reflects the profile now of our ongoing business.

So, first and foremost, we couldn’t be more proud of the growth we achieved during the quarter in our Biovance human amniotic membrane allograft, which on a pro forma basis was the largest driver of our products’ growth during the quarter. Gross Biovance revenue increased approximately 40% from quarter two of 2015 levels, but importantly the second quarter of 2015 included a $200,000 order.

In the second quarter of 2016, our Biovance revenue was actually more than double that of our revenue in the fourth quarter of just 2015. In view of our recent performance, we continue to believe that there is a near-term opportunity in our Biovance franchise, as we continue to focus on targeting surgical specialties over the second half of the year.

Second, the pro forma growth of our MIST therapy franchise was impacted by the launch of our UltraMIST system in April of last year. The 2005 launch of UltraMIST generated strong sales of systems and applicators in the second and third quarters of last year, due to pent up demand, setting aside this difficult comparison, I believe our MIST franchise in an area of our business that we see the potential for improved performance over the second half of the year.

And lastly, while our contract manufacturing business tends to be uneven throughout the course of the year, we were pleased to see a number of large orders come in during the second quarter, and I must say our team has done an excellent job of keeping up with demand.

Now later in my remarks, I will provide more color on our strategy and expectation for our key product lines over the remainder of the year. But first let me review some of the important operational and organizational progress that we made during the second quarter. From an operations standpoint, during the second quarter, we A, expanded our reimbursement coverage for Biovance; B, hosted a number of important events to raise awareness for our products; C, continued to build our clinical portfolio; and D, made important progress in our preparation for the launch of Interfyl, our latest biological product.

Now, beginning with Biovance, during the second quarter we added reimbursement coverage from new commercial and public payors. On the commercial payor front recall that on March 15, we announced our participation in the Blue Cross Blue Shield Association's Evidence Street Pilot Program, and the inclusion of Biovance in its updated guidelines on bioengineered skin and soft tissue substitutes.

Today, I am pleased to report that we have expanded our Blue Cross Blue Shield coverage to include a total of 15 states, representing approximately 40% of the 107 million covered lives under the association’s network. We will continue to work to expand our coverage footprint further, as we progress through the year.

Moving to public payors, we recently received MAC coverage from Biovance from Palmetto and CGS administrators, which went in to effect on May 16 and August 8 respectively. Biovance is now covered by six of the eigth MACs, which collectively represents approximately 80% of the Medicare beneficiaries.

During the second quarter, we also continued to raise awareness of the clinical efficacy and therapeutic benefits of our advanced wound care products, most notably at the Society for Advanced Wound Care Spring Conference in Atlanta, Georgia. We hosted two symposia, which featured MIST Therapy, Biovance and TheraBond and were attended by nearly 200 society members.

Also during the event we hosted a user experience meeting for our Interfyl Connective Tissue Matrix that featured Dr. Bob Hariri Co-Founder and President of HLI as the keynote speaker. Following this meeting at SAWC, we began hosting user experience trials to introduce Interfyl to some of the markets key opinion leaders and our early adopters, as we progressed towards the commercialization and introduction of the product, which I’m happy to report is now on track to incur in late September somewhat ahead of our prior expectations.

In terms of the clinical progress in the second quarter, we presented new cytokine profile data from the tissue and wound fluid collected in our venous leg ulcer study that indicate that our MIST Therapy has an anti-inflammatory affect as part of its mechanism in its promotion of healing of these chronic ulcers.

Jan will be happy to answer any questions you may have on this anti-inflammatory effect, or on our randomized controlled trial for Biovance which continues to progress. All in all we made some great financial and operational progress, during the second quarter, as we continue to enhance our capabilities as a provider of high quality and differentiated regenerative technologies.

In July, we took an important step in this direction, by making a strategic exit from our Sorbion product franchise. Now, let me take a minute to provide everyone on today's call, with some background on this transaction, and the reasons why we chose to pursue it. Recall when we acquired the rights to this product from Sorbion in September of 2013, their previous partner was generating approximately $500,000 in US sales annually.

In less than three years we have been able to grow the product franchise to an annual run rate of approximately $4 million in sales. Yet while our success in growing the Sorbion franchise was a validation of our distribution capabilities in the wound care space, the product line ultimately did not fit in with our shift to high value, differentiated, regenerative therapies. With the contract agreement set to expire in 2018, we decided to maximize the value of the Sorbion asset, which resulted in a transaction of $4.1 million.

As a result of this transaction, we have added additional capital to fuel our future growth objectives, and, importantly this transaction has allowed the organization to focus squarely on our high value differentiated regenerative therapies.

Before moving to a more in-depth review of our strategy for MIST and Biovance, let me now turn this over to Brian for a detailed review of our second quarter financial performance. Brian?

Brian Posner

Thanks Dave and good morning everybody. Before I begin my remarks I would like to remind everyone on the call that sales of Sorbion during the quarter are classified as revenue from discontinued operations due to the sale of the distribution rights. What follows in my prepared remarks in a review of the company's reported results from continuing operations for the quarter, which treats Sorbion as a discontinued item.

Total revenue for the second quarter of 2016 increased $2 million or 80% year-over-year to $4.5 million. Total revenue for the second quarter of 2016 and ‘15 excluded revenue from sales of Sorbion products of approximately $1 million and $648,000 respectively, which is included in discontinued ops.

Revenue from sales of the company's current products which include hydrogels, Biovance, TheraBond, and MIST Therapy increased $1.7 million or 82% year-over-year to $3.7 million. Product revenue represented 82% of our total revenue this quarter, compared to 81% of sales in the second quarter of 2015. Second quarter products revenue includes $2.4 million of sales of MIST therapy, which the company acquired on May 29, 2015.

On a reported basis, sales of MIST Therapy increased by $1.6 million or 187% year-over-year in the second quarter. On a pro forma basis, MIST sales decreased 10% year-over-year in the second quarter, driven by a decrease in system sales compared to the prior-year period. As a reminder, the company's next generation MIST Therapy system, UltraMIST, was launched in April 2015 and drove an increase in system sales growth in excess of 200% year-over-year in the second quarter of 2015.

Revenue from our contract manufacturing business increased $326,000 or 67% year-over-year, to $809,000 in the second quarter. GAAP gross profit for the second quarter increased 1.6 million to 2.9 million or 64% of sales, compared to 1.3 million or 52% of sales during the prior year quarter. The increase in gross margin was driven by product sales which comprised a greater portion of our revenue compared to the prior-year period.

Gross margin on our product sales was approximately 77% in the second quarter of 2016, unchanged from the same period last year. Total OpEx decreased $8.9 million or 92% year-over-year to $787,000 this quarter. The decrease in OpEx in the second quarter of 2016 was largely due to a $9.1 million decrease in the fair value of the company's contingent consideration liability related to the company's acquisition [acceleration].

Additionally, prior-year OpEx included approximately $915,000 of acquisition related expenses. Excluding the impacts of changes in contingent consideration and acquisition related expenses in both periods, operating expenses increased 16% year-over-year to $9.9 million. This year-over-year increase was driven by higher compensation and benefit expenses, primarily due to increased headcount compared to the prior-year period, as well as an increase in commissions related to increased revenue. This increase in compensation expense and headcount is largely due to the Company's acquisition of Celleration.

GAAP income from operations for the second order of 2016 was $2.1 million, compared to a loss of $8.4 million for the same period last year. Excluding the impacts of changes in contingent consideration and acquisition related expenses, loss from operations was approximately $7 million in the second quarter of fiscal year 2016, compared to $7.2 million in the second quarter of 2015. GAAP net income for the second quarter of 2016 was $5.2 million or $0.18 per diluted share compared to a net loss of $7 million or $0.32 per diluted share for the same period last year. The change in net income during the period was primarily due to changes in operating income over the prior year.

Net income in the second quarter of 2016 and ‘15 included 3.8 million and 271,000 respectively of income from discontinued operations related to the company's sale of its Sorbion product franchise. Prior year net loss included an income tax benefit of $1.2 million, resulting from the acquisition of Celleration.

Non-GAAP net loss from continuing operations for the second quarter of 2016 was $5.4 million, or $0.19 per diluted share, compared to a non-GAAP net loss from continuing operations of $4.7 million or $0.21 per diluted share for the same period last year. As of June 30, 2016 the company had $12.6 million in cash and cash equivalents, compared to $26.1 million on December 31, 2015. The largest contributor to the change in cash and cash equivalents was $10.5 million of cash used for operations and a contingent consideration payment of $2.6 million related to the acquisition of Celleration.

It is important to note that the company's cash and cash equivalent as of June 30, do not include the total consideration of $4.1 million from the BSN transaction. The company received $3.5 million of these proceeds on July 1, 2016 and expects to receive the balance of the proceeds in the third quarter of 2016. In July, the company used approximately $1.8 million of these proceeds of this transaction to reduce its outstanding debt balance.

We will require additional capital. We continue to evaluate various inorganic and organic opportunities to potentially improve both our financial condition and path to profitability.

Turning to a review of our financial guidance for fiscal year ’16. As communicated in the earnings press release this morning, for the fiscal year ending December 31, 2016, the company expects total revenue of $20 million to $22 million, excluding $1.7 million of revenue from sales of Sorbion products included in discontinued ops, following the company's sale of the product franchise, Alliqua expects total revenue from continuing operations of approximately $18.3 million to $20.3 million.

The guidance range of revenue from continued operations represents growth in a range of approximately 50% to 67% over revenue from continuing operations of approximately $12.2 million for the fiscal year ended December 31, 2015. On a pro forma basis, assuming Alliqua had reported a full year of MIST Therapy revenue in fiscal year 2015 the company's revenue guidance represents growth in the range of approximately 13% to 25%. Revenue on a pro forma basis for the fiscal year ended December 31, 2015 was approximately $16.2 million.

For modeling purposes, we expect contract manufacturing to increase on or about 10% year-over-year, continued gross margin expansion driven by the continued mix shift of total revenue towards our wound care products, and cash op expense in the range of $7 million to $8 million per quarter.

With that, I'll turn the call back to Dave. Dave?

Dave Johnson

Thank you, Brian. Before we open the call up for questions, I would like to take a minute to provide everyone with just a brief update on our strategy for driving growth in our major products, as well as on our longer term goal of building a best-in-class portfolio of advanced therapies.

Now that we have completed the sale of our Sorbion franchise, we expect our growth over the second half of the year to be driven by Biovance and our MIST product lines, and we continue to execute on targeted sales strategies in each of these franchises, beginning with our Biovance franchise. So, during the first quarter of 2016, we began to experiment with expansion into adjacent areas of the wound care market, specifically in the surgical setting.

As some of our selling resources began to focus more in these areas of the market, we received promising feedback from the surgeons that they were engaged with and decided to allocate some greater focus to this experiment, as we moved into the second quarter.

Today we are really encouraged about the progress we have achieved with the initiative over the first half of the year. Importantly, we believe that we remain in the early innings of pursuing our strategy in these markets, and we will continue to work closely with the surgeon community over the second half of the year, to further grow this portion of the Biovance business.

Now, one year after closing our acquisition of the MIST Therapy platform, we continue to feel very good about the technology and our opportunity to drive its adoption in the marketplace. MIST Therapy has the potential to become an integral part of the healing treatment process, as it can be coupled with other advanced and traditional therapies to treat a variety of different wounds.

And importantly, MIST Therapy is also the leader as the first non-contact, low frequency ultrasound device to be cleared by the FDA, with an indication to promote wound healing. In order to drive increased adoption of this platform, we are focused on targeting specific customers who can benefit from adopting MIST and educating them on the therapeutic benefits, clinical efficacy, and compelling reimbursement of MIST Therapy.

Specifically, given the strength of our clinical and economic evidence in venous leg ulcers and deep tissue injury, we believe these two areas represent significant opportunity for MIST technology, going forward. We also continue to work with our potential customers, provide them with greater financial flexibility through a variety of equipment, acquisition options, including sale, rentals, paper use, and consignment options.

More important to our near term growth is our ability to ensure that our devices are being utilized across both our new and existing user base. To this end, our team is working more closely with our existing customers to help them efficiently incorporate MIST Therapy into their practice, with an additional focus on practice enhancement. We've also begun organizing events where (inaudible) customers can hear from key opinion leaders and MIST Therapy customers who have adopted the technology as a standard of care on; A, the therapeutic benefits of this technology; and B, on techniques for efficiently incorporating it into the wound treatment process.

For example, we recently began best practice sharing events, where we connect new prospective customers with existing centers of excellence, enabling in it a real exchange of real world clinical experience with MIST technology. These events have provided new customers with insight into how they deploy the technology within their clinical setting, and integrate MIST Therapy into their protocol of care.

In short, we see a significant runway ahead of us in our MIST franchise, and believe that we are taking the right approach to driving incremental growth in new accounts and utilization. Lastly, in addition to our commitment to driving growth in our major products, we continue to work towards our goal of adding innovative and high value technologies to our product portfolio through both organic and inorganic means.

First as I mentioned earlier, we continue to progress towards the launch of our latest regenerative product, Interfyl. During the second quarter, we began hosting user experience trials with a number of wound care and surgical KOLs. These trials have gone extremely well, and in the third quarter we have decided to enter into a beta launch with these users, based on their experience, and more importantly, requests to have access to the product after the trial was completed.

We now expect to begin our commercial introduction of the product at the end of the third quarter in September, ahead of our previous expectations of timing. Now, although we do not anticipate meaningful revenues from Interfyl during the remainder of the year, we plan to lay the foundation for commercial traction going into 2017.

In addition to Interfyl, we have just completed a strategic review with Human Longevity, Inc., our partner and supplier of Interfyl and Biovance products and the relationship between our two enterprises continues to progress extremely well. And lastly, we remain focused on evaluating inorganic growth opportunities, primarily in the area of functional regeneration, which could deliver incremental shareholder value moving forward.

In summary, with a more focused sales team and approach as well as defined priorities for our business, we will continue to drive growth as we work towards our goal of becoming a prominent provider of differentiated healing technologies over the second half of 2016. I want to thank you for your interest in our growth story, and we believe our efforts and strategic focus will result in attractive returns for our shareholders.

That concludes my prepared remarks for this morning, Operator. I wonder if you'd now open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Matt Hewitt with Craig-Hallum. Please go ahead sir.

Matt Hewitt

I was hoping to drill into your move into the surgical specialties a little bit. Could you describe the competitive landscape there, relative to maybe the advanced wound care market? What is the difference in both the competition and more importantly the changes that you need to go through from a selling perspective? I would expect that that's a very different market than going after the wound care clinics.

Dave Johnson

I think I'd break it down into two things and then if my colleagues have anything else. So, number one, the competitive landscape is very different. First of all to play in this space, there is a necessity to have the level of skill sets in areas such as medical affairs, medical expertise that quite frankly sometimes is not needed in the hospital outpatient department, and that eliminates a large number of competitors going into this space. So we see less competitors than we would, as an example, in the hospital outpatient.

Second of all, we see different competitors at times whose maybe sole focus or primary focus may be something else. So as an example, it may be an orthopedic company whose primary focus is their metals and their plastics, and their secondary focus happens to be in the regenerative space, and because we have our primary focus in the regenerative space, we think that's a very strong value proposition. So I think that full competitive landscape is exceptionally different.

To your second question, Matt, (inaudible) blessed that a number of our selling organization have a surgical background. So we have used that expertise in this early, I'll call it, experimentation where they had a surgical expertise, they were comfortable in the OR, and that's helped us very well. As we continue to progress down this road, we will need to be sure that we provide the right skill sets into this space.

You're right there's a lot of similarities, and then there's definitely some specific differences which we have to be cognizant of. Up until now we've done just fine with our current resources. We'll see how the future goes as we continue to move forward. Matt just one other thing that Brad and Nino just pointed out, as you probably know this is under a DRG, so it's a very different type of reimbursement, and a different type of value proposition which up until now, Biovance has excelled in quite frankly. So, it's another point which I think is important.

Operator

And we’ll take our next question comes from Glenn Novarro from RBC Capital Markets.

Glenn Novarro

Two questions; first Dave, you highlighted that you have received additional MAC coverage of Biovance, yet there's been a bit major challenge of getting Biovance used even within the MAC. So can you talk about what are your expectations for Biovance within the MAC environment today, has anything changed that makes you a little bit more positive about the MAC coverage? And then I have a follow-up on Interfyl.

Dave Johnson

So I would say again, two things on it; number one, our three key focus areas for Biovance continue to be, I'll call it, the acute surgical/space under the DRG and reimbursement. The Vas, again as you know, that's more of a base budget that the VA works under, and then in the hospital outpatient department. So it absolutely remains one of the three key target areas, Glenn.

As we continue to gain MAC coverage and quite frankly, maybe more importantly, the commercial coverage. I talked about Blue Cross and Blue Shield. One of the challenges for any company who's playing in the space is a customer may look at you and say, okay we like it, and yet we're covered in Medicare, but what about those patients who don't use Medicare or have a co-payment under Blue Cross/Blue Shield, and if you don't have that kind of coverage it continues to be a barrier.

So, as we continued to build on the commercial coverage, we believe it will continue to be a place where we can drive growth. But let's not forget about the other two areas, which we continue to drive growth in surgical and the VA as well, Glenn.

Glenn Novarro

So if you think about your reps, are they spending a majority of their time in the surgical setting versus outpatient right now?

Dave Johnson

No. I would say right now it's probably 85, 15 outpatient, VA, I'll call it general acute, and then 15% in surgical. Glenn, remember, some of the surgical call points are parallels to where we would go for something like a very difficult diabetic foot ulcer anyways. But I would think 85, 15 right now, and I don't see that changing unless we make some investments as we continue to build this business up.

Glenn Novarro

Okay, but the growth right now you're saying is in the surgical setting, though?

Dave Johnson

I would say our number one growth area has been the surgical setting followed by VA, followed by the hospital outpatient departments.

Glenn Novarro

And then just on Interfyl, you talked about, you've introduced the product to several KOLs in 2Q and several have agreed to start testing or piloting the product for you. Can you talk about what is it about the product that is intriguing to these specialists, and what are they going to replace? So, they're using something today, and what are they giving up to use Interfyl?

Dave Johnson

I'm going to turn that over to Jan Smiell. I think Jan can probably help us more articulately than I can. So Jan?

Janice Smiell

Sure, thanks. So Interfyl is a product that is placenta-derived, but it's not an amnion product. However, it comes in two forms, a particulate, so it can be placed on a surface in sort of flakes or it can be flowed either through a cannula or injected through a needle. So, the format is similar to some other products that are out there, however, the consistency of our product is different from our competitors.

And what some of our KOLs like is that difference in consistency. When it's placed into a tunneling wound, for example, it doesn't leak out. When it's placed into a surgical space with a needle, then it stays in the area where it's placed. So, that's one huge differentiating factor that a lot of our surgeons like and as well as our wound care experts.

Apparently from its clinical outcomes, we're hearing that it performs better than what had been anticipated by those same users, who have experience with other competitor products.

Dave Johnson

So that gives you some perspective, Glenn on where Interfyl is fitting in. Think of it as a filler though. I think that's the best way. Anywhere where there's a fill, and quite frankly while the wound is definitely a key area, there's been usage actually in the shoulder and upper extremities, which has shown some interesting results. So, this could be a platform for much further kind of I'll call it ancillary markets than maybe what we play in today.

Operator

[Operator Instructions] our next question comes from Josh Jennings from Cowen and Company.

Josh Jennings

I wanted to just check in Dave and team, about - you're talking about continuing to build out the body of evidence across the portfolio, and just how impactful that could be to our understanding that MIST has some of the most robust outcomes data in the wound care space, and has data been the driver of MIST success.

I'm just trying to get a handle on how you guys are thinking about (inaudible) critical evidence versus the robustness of the product portfolio versus sales force productivity in terms of how we should be thinking about the drivers of Alliqua's success in the market.

Dave Johnson

First of all, in this space one needs data, and as we continue to work with the physician community and the surgical community, data is demanded for any product that's going to be successful. Clinical efficacy is absolutely number one. So, you need that, but that alone probably isn't going to get you to the Promised Land. And so there needs to be an economic value proposition, there needs to be an ability to articulate that message, create relationships at the physician and surgeon level, and so the truth is this you need all of those things, which is why we're excited about MIST.

To your point, we have some of the best clinical data. We have some outstanding reimbursement in the hospital outpatient department. The clinical data in particular and I referenced it briefly in my opening remarks. In areas like deep tissue injury, let's just take that for a second, one of the largest challenges that institutions continue to have today is to deal with pressure ulcer prevention, and with the data that we have both in DTI and then places like the Mayo Clinic, who use it as their standard protocol of care around deep tissue injury, this is exactly the kind of targeting that needs to take place.

So, I know I didn't answer it specifically, but I think the answer is, you need all of those components. The good news is, I think we have all of those in place at this stage.

Josh Jennings

If I were to think about the sales force productivity and the strategy going forward, it sounds like there's a lot of room to improve productivity with the current sales rep numbers that you have. Should we be thinking about improved productivity over the next six, 12, 18 months, and then building out sales force? I'm just trying to gauge sales force expansion versus growth trajectory, and then also just wanted to get an update on the stability of the sales force over the quarter, any attrition by choice or mandated by management in Q2?

Dave Johnson

Okay, so from a sales force productivity perspective, I think Josh we've talked about this before, and I think it's pretty much an industry standard. I think if you get the maximum productivity in sales rep, you're looking at approximately $1 million a sales rep. But the only way to get there is leave enough dry powder that people can work into that.

So, you never want to actually have 20 sales reps and $20 million because that mitigates your ability to grow in the marketplace. So today our total sales reps, we have approximately 35 sales representatives on a business that's going to do somewhere close to $20 million and then growing next year.

We have no plans to invest in further sales force at this point. But think of now we're going to bring out Interfyl, we continue to be extremely bullish about Biovance, MIST Therapy, as we continue to grow that business towards the end of the year in the mid-single digits for the business. So it will grow into that and I do believe we have enough dry powder in the organization to allow us to continue to build into that getting upwards to $1 million of sales reps.

So, the answer is absolutely yes. We believe that sales force productivity will continue to be enhanced over the next six, 12, 18 months.

Brian Posner

I was just going to say, just to add to that, if you think about the last time we talked to you guys, we talked a lot about the number of new people we had coming on board at the time. And so if you think about that at this moment in time and what we saw in Q2, is a number of those representatives were maturing if you will in their territories, and we're seeing more and more productivity out of those newer folks as we move through the year.

Dave Johnson

Hopefully that answers your question, Josh.

Operator

And our next question comes from Suraj Kalia from Northland Securities.

Suraj Kalia

Dave a lot of questions have been answered let me see if I can come at it from a different angle. In terms of sales reps, did you mention the number of reps on hand?

Dave Johnson

I didn't. I think I just referred to 35 as far as account representatives. We remain pretty much where we've been, Suraj. We have 43, 44, 45 selling resources, which is really where we've been now for some time.

Suraj Kalia

And is there expectation to beef these up or there is enough unused capacity, if I can use that phrase to carry through the end of the year and hopefully come out at par or ahead of where you all are thinking in terms of guidance?

Dave Johnson

That is correct, Suraj. I see no reason why we would need to expand our sales force at this stage to achieve our 2016 guidance. We feel very comfortable in what we have on the street.

Suraj Kalia

And Dave there seems to be a subliminal enthusiasm for Biovance in a surgical setting right now, at least based on your prepared remarks. Dave can you give us a layout of the land, especially surgical setting is not new, we all know in terms of whether it's EpiFix and now Derma Sciences has acquired BioD.

Lot of these other players have already been there, doing well. The constraints of a surgical setting and the requirements, whether it's sort of [Prostacme] or others they are quite different. You guys are obviously seeing something that tells you all we got to put the resources for Biovance in a surgical setting.

I guess the first part of that question is, what specifically are you all seeing now that gives you increased confidence, clinically or otherwise, and the second part of that question is, if 15% of the time by your reps is being spent in a surgical setting, where do you think that could go to?

Dave Johnson

I'm not sure it was a subliminal message. I think it was a very direct message. We're very excited about what we're seeing in the surgical space Suraj. And listen I think to Jan's point we have - if you think of this in this way, we targeted a couple of specific surgical specialties. When we say surgery, we have no plans to start moving into total hips and total knees, and a lot of other areas around the surgical space.

We're being extremely focused right now into a couple of areas where we think we can win, and why could we win? We started off with some expertise; Biovance in particular, was used in a couple of techniques from surgeons which seemed to work exceptionally well. That caught on quickly in the marketplace that both the product and the technique were appropriate, and then, following on the heels of that, Interfyl started to show some signs to be extremely encouraging, and was very much targeted and focused in the same space.

So knowing we had a second product coming right behind Biovance, just made good sense to spend the time in the surgical area. Will we spend more than 15% of our time in the surgical area? I think it's very possible over time, but we will have to be thoughtful and measured about making any of those allocation changes.

I think where we are in Q3 and Q4, we feel very good about. We'll look at some additional both internal product opportunities coming out of HLI. We continue to spend time in some inorganic opportunities. I think those will lead us to where we need to be in regards to the amount of focus in this surgical space.

Suraj Kalia

Dave can you give us a comparative perspective on MIST? In your prepared remarks you mentioned about you all are thinking about selling versus renting versus consignment. Can you give us a perspective of how it was before and what has changed that gives you guys - there needs to be a shift in strategy specifically related to MIST?

And Brian in terms of - you guys have been on an acquisition spree in the past. Now that Sorbion - there's a divestiture that has occurred, do you all feel we need to take a breather, let's optimize what we have and then we get to the next stage, or any color on that front would be great.

Dave Johnson

Okay, let me handle the first one. So as I mentioned in the remarks, we today offer really four ways to put MIST systems into a customer. One is to sell the product, one is to rent the product, one is what we call pay-for-use, and one is consignment, and all four of those have small ways in which they can - there's combinations, I'll call it. Today I would say and I'm going to guess, but I think I'm going to be very close that 80% of our sales on systems remain being sold into the marketplace.

However I think it's too early since we have changed some of these programs specifically on consignment and pay-for-use. I would think that sales will go down somewhat over the next 6 to 12 months, and some of the other areas will go up. Rentals, as an example, are up 10% this year year-over-year.

Again, cannot lose focus on two things; A, the more units we have out there, and then the more we create productivity for those units, with 85% gross margins that continues to be what we need to do to be successful in this market. With that I’ll turn it over to Brian for question number two.

Brian Posner

I think one, we're very excited as Dave and some of my colleagues here have said about our existing product portfolio. However, we continue to look at both leveraging that portfolio and perhaps additional products to our portfolio to get us closer to profitability, if not outright profitability, because ultimately that's what we're here to do. And we have the ability with our infrastructure to be able to leverage additional revenue into the company. So, we're excited both about what we have and what the future portends.

Operator

And our next question comes from Swayampakula Ramakanth from H.C. Wainwright. Please go ahead.

Swayampakula Ramakanth

Couple of quick questions on MIST and then may be one or two question on your regenerative products. On the MIST itself just a little bit of housekeeping. In the second quarter, you just reported 2.4 million for MIST. Can you give us what the six-month number is on the sales itself?

Brian Posner

Approximately 4.9 million.

Swayampakula Ramakanth

Continuing on MIST, Dave in your prepared remarks you were saying that, since the introduction of UltraMIST there was some sort of an impact in sales in the second and third quarter of last year. How much of that anomaly should we be aware of going into the second half of this year, because you're expecting some growth or better growth in the second half compared to the first half, but at the same time if there is going to be an anomaly how much of that is going to impact it?

Dave Johnson

As you know, UltraMIST was launched in April of last year and there had been pent-up demand, quite frankly. So, the second quarter and the third quarter in particular were very high capital months. But of course along with every piece of capital, even if you're upgrading, you're purchasing a couple of months' worth of applicator inventory as well.

So it was just a difficult comparison if you look on a year-over-year basis. The ability now to move from where we are through the last half of the year, while we'll still go through some difficult comparisons in Q3, things will be normalized by Q4. We continue to like the trend of the business, and so we continue to see applicators growing in the mid-single digits by the end of the year, and the business continues to move in a very positive direction.

Swayampakula Ramakanth

And then couple of questions on Biovance/ Interfyl; regarding the Biovance product, how do you see the Blue Cross/Blue Shield expansion help out, in the sense what is the significance of that? And also, what has management learned in launching Biovance, because that was one of your initial products in that space. Now, going in with the launch of Interfyl which is a unique product in itself and a little bit of a different market placement, how are these learnings helping you? It looks like you're trying to be very careful with Interfyl, are you overly cautious or you think you're taking the right amount of precaution going into the launch?

Dave Johnson

So let me answer the last question first and then I’m going to turn it over to Nino on the Blue Cross/Blue Shield reimbursement. I am so proud of our team here at Alliqua for I'll call it as the market shifts so dramatically, so think if we launched Biovance - when we launched Biovance, there were five amnion products out in the marketplace.

I think we had a very strong targeting strategy. We love the product to this day, and then within one year this marketplace completely changed. And now the market, specifically in the hospital outpatient is so crowded that it's become very difficult for any one of the new companies to differentiate their product. So why I'm proud of our team is that they worked together to determine where we could win. We knew we had a great technology, but where could we win and how could we win.

And some of these small adjustments into the surgical space, as an example, into the VAs, into working with MIST Therapy and Biovance to have a stronger value proposition in the hospital outpatient department these are ways in which the team was able to adjust in a very difficult and challenging marketplace that happened so darn quickly. So, as we launch Interfyl, I think we're being appropriately cautious, but I will tell you it's cautiously optimistic.

These user trials have been very exciting, and while it will take us several months to get through Product Evaluation Committees, etcetera, which is why we don't envision huge amount of revenue in Q4, we're very excited about it in 2017, and we'll be able to use those learnings on how the team shifted the Biovance focus to do the exact same thing with Interfyl moving into the market. So, that's a little bit of the second question.

Nino, maybe talk a little bit about Blue Cross/Blue Shield.

Nino Pionati

I think you heard Dave say earlier, one of the other things that we learned as we started moving Biovance into the outpatient market was that as we walked into outpatient centers, having that coverage is important, but having broader coverage is also of importance, because physicians and their staff don't want to be dealing with different products for different payers.

And listen, I'll give full credit to the reimbursement team here. We've got a team of dedicated professionals who pursued a strategy of not only increasing MAC coverage, because last year at this time we had one MAC, as you heard. We have six of eight MACs on Biovance at this point.

We've increased our covered lives dramatically, not just with Blue Cross/Blue Shield, but with other carriers and we continue on a strategy of pursuing that, and we believe that by getting broader coverage, and especially having someone like Blue Cross/Blue Shield also enables us to get other commercial carriers to come on board. So, it's part of the strategy. It's not the magic bullet, because you still have to go in there and roll up your sleeves and convince the physicians about the benefit of your product, but it is one of the elements that's required in order to have a successful sale.

Operator

[Operator Instructions] our next question comes from Keay Nakae with Chardan.

Keay Nakae

Dave can you give us an update on where you're at (inaudible) Biovance?

Dave Johnson

Yes. Let me actually ask Jan, the randomized control trial for Biovance.

Janice Smiell

Sure. We've got about half of the number that we want for a randomization. We had enrolled certainly almost more than double that just to get to that halfway point. What we're finding is that a number of our enrolled patients during the run-in period are progressing to healing faster than the protocol allows for them to be randomized, which means that there may have been some substandard offloading or other wound care (inaudible) to coming into the study.

And that seems to be very typical these days for the diabetic foot ulcer study. So, we're working with our active sites and looking at all different ways to increase their base to consider for enrollment in the study, and they're very active in doing their screening and getting people into that run-in period. So, we do anticipate that we won't have full enrollment by the end of the year, and what will be going into the first quarter next year.

Keay Nakae

Just a second question on Interfyl, can you give us a sense of where the product will be priced? Is it close to $100 product or a $1,000 product?

Dave Johnson

Closer to $1,000, very typical in the regenerative space. Much closer to in the 1,000s not the 100s.

Operator

And it appears we have no further questions at this time.

Dave Johnson

Thanks, everyone, for taking your time this morning. We're encouraged about Q2, we're excited about moving into Q3, and we appreciate you continuing to follow the Alliqua story. Thanks, everybody.

Operator

That will conclude today's conference, and thank you for your participation.

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