MiMedx Group Inc (MDXG) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MiMedx Group Q4 2014 earnings call. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Thornton Kuntz, Vice President Administration. Sir, you may begin.

Thank you, operator, and good morning, everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934.

These statements are based upon the current beliefs and expectations of our management and are subject to risk and uncertainties. Actual results may differ materially from those set forth in, contemplated by or underlying the forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission including our Form 10-K for the year ended December 31, 2013, 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 will turn the call over to Pete Petit, MiMedx Chairman and CEO.

Thank you, Thornton, and good morning. I thank you for joining us. As usual I have with me Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Chief Financial Officer. Certain other corporate executives are also on the call including Thornton Kuntz who you just heard from, our Senior Vice President of Administration.

I'm going to keep my comments very short this morning. I believe that our 2014 year and our fourth quarter had been reasonably vetted already. We have already reported that our revenues were $118.2 million in a press release just prior to the JPMorgan meeting. We discussed numerous aspects of our business at our October 12 analyst meeting in New York. Eight members of the management team spoke and other members were there to answer questions.

I think we highlighted our strategic initiatives and outlook for 2015 quite adequately at that meeting. As a matter of fact, if you would still like to hear and view the presentation from the analyst meeting, they are available on our website. Frankly, very little has changed from what we presented in October. Of course you now know we finished the year by exceeding our revenue estimates.

This time last year we saw a temporary dip in our stock price because there were concerns that some of our new competitors would (inaudible) take market share from us at the Department of Veterans Affairs or VA. The focus was on the VA because it was not that long, arduous road required for reimbursement coverage.

However, as you have seen in our press release, our VA revenues were actually up 18% year over year and 24% in the fourth quarter over fourth quarter of 2013. Therefore I don't think those concerns a year ago were realistic.

To date we have similar concerns that have developed around the fact that our EpiFix allografts for wound care will not have pass-through status going from 2015 forward. As we've previously stated, we have been planning for this eventuality for almost a year. We have developed numerous other graft sizes that are under the bundled rate which also further minimizes wastage.

In addition, we have produced some innovative new forms for our sheet allografts which are also under the bundle. Therefore we think we've accomplished all the planning necessary to protect our market by minimizing the grafts that will not be covered under the bundle going forward.

Now Bill Taylor is going to remind you again about what a small percentage of our EpiFix allografts were actually outside the bundle anyway. You are going to find out that a number -- that number is extremely small and I think you're going to find as we report the first quarter that we've more than sufficiently mitigated any risk associated with expiration of pass-through status with our new product innovations.

The second issue I would like to provide an update to you for is on -- relates to the OIG subpoena. Since our last discussion we have confirmed that this relates to a qui tam action so there is a relator in this case. That generally means as an individual it could have been one of our ex-employees that we have terminated, it could be a competitor's employee, it could be someone unaffiliated with any of these companies. But it is an individual.

The OIG has to decide shortly whether to intervene in the case or decline to intervene. They seem to be focused mainly now on two issues. One relates to information on our sales expense reports. We have provided almost 60,000 lines of computerized information covering a period of the last two years to them. While the government has not given us any feedback on information we submitted, based on our sampling of the data submitted we did not see anything of concern to us.

Now the second issue of focuses on our reimbursement hotline service guarantee. We have forwarded all the relevant information related to the service guarantee to our attorneys and then to the OIG. The objective of this program is clear that this is not designed to provide doctors a guarantee of reimbursement on our products. We vetted the program through our outside legal counsel before we implemented it in exquisite detail.

We only credit a physician when our highly trained staff makes an error in providing information on a patient's coverage and the provider relies on that information to their detriment. Credits issued under this program have been less than 0.01 of our revenues which is of course minuscule.

We have also been told that the OIG case will be reaching a critical decision point within the very near future. At this point we think we have been extremely responsive relative to the requested information. We are hopeful that this will soon be quickly resolved.

Now let me try to clarify some issues related to our 17-month discussion with the FDA related to the untitled letter which MiMedx received on August 28, 2013. There have been some new developments which we believe will be helpful in assisting us with resolving numerous matters associated with that letter and the subsequent FDA decision to discussions we have had.

In December the FDA put out a request for comments on a guidance document related specifically to their interpretation of minimal manipulation. FDA also recently announced that it would issue similar guidance on a homologous use of allograft tissue. Fortunately these requests have highlighted the issues that we've brought to the FDA's attention over the last 17 months.

Several trade associations such as the American Association of Tissue Banks, the Alliance for Regenerative Medicine as well as other industry participants have filed comments to the FDA draft guidance alleging that FDA has extended its authority in trying to change the way tissue products are regulated without going through a formal notice and comments rulemaking.

In addition, congressmen and senators are also becoming involved relative to the way the FDA has attempted to change guidance related to pharmaceuticals as well as medical devices and now tissue. There are rules and regulations in association with making those changes and, according to numerous experts, the FDA has not followed those protocols.

At this point we cannot assess the timing of the outcome of all of these initiatives. However, it is very refreshing to see numerous other companies and trade organizations and Congress pointing out the same issues that we have had with the FDA over this last 17 months.

There are problems associated with the issuance of untitled letters and there are problems associated with the agency attempting to change guidance without following the proper procedures and processes.

Optimistically this might mean that we can develop some clarity out of the confusion related to our untitled letter. We will certainly keep you informed as these events unfold. I will now turn the discussions over to Bill Taylor. Bill?

Thanks, Pete. The fourth quarter of 2014 and the full year 2014 were absolutely incredible. Our organization continues to grow significantly and create new opportunities utilizing our unique PURION Process amniotic tissue. And the fourth quarter was certainly an excellent quarter on all fronts. So let's talk first about our sales and sales organization growth.

In 2014 we grew 100% in revenue and our fourth quarter grew by over $6 million or 18% compared to Q3 of 2014, but were $21 million over -- or 120% compared to fourth quarter of 2013. So our growth was led by commercial Wound Care, but other areas also grew significantly.

So you may also recall a year ago that many of our competitors that did not have commercial coverage were saying that they were targeting the VA's, like Pete said. Many investors were concerned they would capture a large part of our VA business.

Yet as the year played out they frankly stopped talking about their VA efforts and we grew our federal business by 18%. And as Pete mentioned, in the fourth quarter grew by 24% compared to the fourth quarter of 2013. So our federal business is strong and continues to grow.

In our call in October I mentioned that we were at over 150 field sales personnel and would be at 160 or more by year end. Well, we were close to 170 at the year end and today we are a little bit over 180 field sales personnel. And we are targeting the addition of about 20 more sales executives by the end of this quarter or the first week in April. And that will put us over 200.

So you will recall that late last year we were targeting over 200 people by the end of this year, so we are quite a bit ahead of that pace. I would estimate that the new target for the end of this year would be in the neighborhood of 240 field sales personnel.

So our growth over the past few years has primarily been in the wound care area as you know. however, we have recently added several new sales executives to our surgical team with a focus on people with experience in robotic surgery, specifically urology and GYN cases. We expect some very strong growth in this area this year. We brought in some incredibly talented men and women into this group so we are very excited to see this group grow throughout this year.

Related to the growth of our sales organization, I also want to briefly mention our operating profit. This was the second consecutive quarter where we had an operating profit and it will grow over this year. Now that said, it won't necessarily grow in a linear fashion, because as we add to our sales team we tend to hire in groups of 10 or 20 people. So we may be a little bit lumpy quarter to quarter, but over the year it should trend up nicely.

Changing to our clinical studies here, I want to point out again our multi-center, randomized control trial that we published late last quarter. This was the first multi-center comparative RCT between two skin substitutes showing not only clinical effectiveness but also cost effectiveness and comparison of waste.

We have more studies to come, but this study was very special. Not only did it replicate the 90% plus healing rate of EpiFix for diabetic foot ulcers in six weeks in a multicenter study, but also highlighted the drastic difference between EpiFix and one of the former market-leading products, Apligraf.

EpiFix healed about twice as many wounds as Apligraf in about one quarter of the time for about one-fifth of the cost and with about one-sixtieth of the wastage. So it was truly a landmark study. And we think this is the new standard in chronic wound care randomized control trials and over time we expect more companies will be required to conduct this type of comparison study in order to get reimbursement.

Now briefly regarding our IND for our injectable for plantar fasciitis that is related to our first BLA application. We have completed site initiation at one of our sights and another three sites are expected to be initiated next week and we also expect to start enrolling patients later this quarter. So as we progress in our enrollment we will update you periodically.

We are also very close to the submission of our second IND submission for an injectable wound application. So we will give you more information on that is that progresses.

Recall last year we described how many people had overestimated the effect that the expiration of CMS pass-through status would have on EpiFix. Now remember, none of our federal business is applicable relative to the expiration of the pass-through status. Neither does our spine, orthopedic or surgical revenue be applicable there. Neither does our commercial revenue for wound care or our physician office revenue.

So also remember that over 70% of the wounds that are treated by our product -- our EpiFix product line can be addressed by our sizes that are under the bundle. And when we did this analysis last year we had only estimated around 8% would potentially be negatively affected by expiration of the pass-through. So now we have additional sizes and configurations that will expand that and will help address that 8% of the business.

Now, changing topics now to our first-quarter performance. To date first quarter 2015 basically is turning out as we expected. Our new sizes and configurations for EpiFix are being well received. We had our national sales meeting, we call it national team meeting in early February. We launched these new products to some incredible enthusiasm from our team.

On our next call in April I will explain the new configurations and product launches in some more detail but will refrain from doing that today. The bottom line is so far in the first quarter January came in essentially where we anticipated and February is expected to do so also. We still have to get through March and our team is confident that we are going to hit our numbers.

One other operational note I want to mention relative to our facilities. As you know, we moved into this building in Marietta in June of 2013, so less than two years ago. Believe it or not, we have almost outgrown this 80,000 square foot building. So we've negotiated a lease on another 25,000 square foot office building in our current business park, it is about half a mile away, we hope to have that lease executed any day now.

So this facility will enable us to add roughly another 140 or so people to our headquarters campus. So this is definitely a -- continues to be an exciting growth period for us. And with that I will turn it back to Pete.

Thank you, Bill. Okay, Mike.

Thanks, Pete. The Company recorded revenue for the fourth quarter of approximately $39.6 million, an increase of 120% or $21.6 million over prior year fourth-quarter revenue of $18 million.

On a market segment basis Wound Care revenue was $32.2 million, which represents approximately a 200% increase over prior year and 24% sequential growth. Surgical, Sports Medicine and OEM revenue was $7.4 million, which represents approximately a 4% decrease over prior year and a 2% decline versus Q3. The slight decline in Q4 was driven by lower sales to distributors.

Please remember that year-over-year comparisons will be impacted slightly by the inclusion of total micronized revenue in 2013 in Surgical, Sports Medicine and OEM segments whereas in 2014 EpiFix micronized revenue was included in Wound Care and AmnioFix micronized revenue was included in Surgical, Sports Medicine and OEM revenue.

On a customer segment basis commercial revenue was $28.7 million which represents a 210% increase over prior year and 27% sequential growth. Federal revenue was $10.8 million which is a 24% increase over prior year and flat sequentially.

Growth was driven by penetration in new accounts as well as increased sales at existing accounts in both customer segments. For the 12 months ended December 31, 2014, we reported revenue of $118.2 million which is a 100% increase over prior year revenue of $59.2 million.

On a market segment basis Wound Care revenue was $93.6 million which represents a 183% increase over prior year. Surgical, Sports Medicine and OEM revenue was $24.7 million which is a decrease of 6% as compared to prior year. The decrease is due to the previously mentioned micronized revenue reporting change.

On a customer segment basis year-to-date commercial revenue was $78.4 million which represents a 208% increase over prior year. Federal revenue was $39.8 million which represents an increase -- an 18% increase over prior year.

Gross margins for the quarter were 91% as compared to 83% in the fourth quarter of 2013 and 90% in the third quarter of 2014. On a year-to-date basis gross margins were 89% as compared to 84% in the prior year. Improvement in gross margin was driven by both product and customer mix.

R&D expenses for the quarter were approximately $1.8 million or 5% of quarterly revenue as compared to $1.4 million in Q4 of 2013. For the 12 months ended December 31, 2014, R&D expenses were approximately $7 million or 6% of revenue as compared to $4.8 million for the same period in 2013. The increase in R&D spending is driven primarily by increased investments in clinical trials.

Selling, general and administrative expense was approximately $29.2 million for the quarter or 74% of quarterly revenue as compared to $14.3 million or 79% of quarterly revenue in 2013. For the 12 months ended December 31 SG&A expense was $90.5 million or 77% of revenue as compared to $46.2 million in 2013.

On a sequential basis SG&A expense increased by approximately $5 million due to additional sales commissions tied to the revenue increase as well as accelerated hiring of an additional 29 direct sales associates as well as the hiring of additional reimbursement and marketing support personnel.

The Company reported positive adjusted EBITDA margins of 22% or approximately $8.5 million for the quarter ended December 31, 2014 which is a $7.2 million improvement as compared to an adjusted EBITDA of $1.3 million in the fourth quarter of 2013.

It is the 12th consecutive quarter of reporting positive adjusted EBITDA. The improvement is driven by increased sales volume, improved gross margins and the corresponding operating leverage. For the 12 months ended December 31, 2014, our adjusted EBITDA margin was 17% of revenue or approximately $20.7 million which is an increase of 278% or $15.2 million as compared to prior year. Included in our press release is a reconciliation of adjusted EBITDA to reported net income.

Operating income in the fourth quarter was approximately $4.7 million or 12% of quarterly revenue, which represents an improvement of $6.1 million as compared to an operating loss of $1.4 million in the fourth quarter of 2013. Operating income for the full year was $7.1 million or 6% of revenue which is an improvement of approximately $9.7 million over the reported prior year operating loss of $2.6 million.

The Company reported net income for the fourth quarter of approximately $3.8 million or $0.04 per basic common share and $0.03 per share on a fully diluted basis as compared to a net loss of approximately $1.4 million or $0.01 per basic and diluted common share in the fourth quarter 2013.

Fourth-quarter net income is net of provisions for federal and state income taxes of approximately $811,000 which represents the corporate alternative minimum federal taxes as well as state income tax.

For the 12 months ended December 31, 2014, reported net income was approximately $6.2 million or $0.06 per basic and $0.05 per fully diluted common share as compared to a net loss of $4.1 million or $0.04 per basic and diluted common share for the full year in 2013.

Turning now to the balance sheet, the Company continues to strengthen its balance sheet with strong cash flow driven by improved working capital management. The Company reported approximately $85.7 million in total current assets including $47 million in cash, $5.8 million in short-term investments, $26.7 million in accounts receivable and $5.1 million in inventory.

Days sales outstanding improved for the third consecutive quarter to 61 days from 63 days at the end of the third quarter. Inventories increased approximately $400,000 as compared to the previous quarter end in anticipation of continued revenue growth.

Additionally, we have approximately $3.3 million in long-term investments. Both the long and short-term investments represent fully insured certificates of deposit. The Company reported $18.4 million in current liabilities with quarter-over-quarter increases in provisions for payroll cost, sales commissions, bonus expense, insurance cost and bad debt due to increases in headcount and increases in sales volume. Please note that there is zero debt on the balance sheet.

Total stockholder's equity was $89.3 million which represents an increase of approximately $15.7 million as compared to the $73.6 million as of December 31, 2013. Also please note the Company repurchased approximately 42,000 shares in the quarter under the share repurchase program bringing the number of treasury shares to approximately 937,000 as of December 31, 2014.

Turning now to the statement of cash flow. The Company reported positive cash flow from operating activities of approximately $8.3 million for the quarter as compared to $800,000 for the quarter -- fourth quarter of 2013. Positive cash flow from operating activities for the quarter was driven mainly by an increase in adjusted EBITDA and improved working capital management.

Cash used in investing activities in the quarter included $9 million in investments in the previously mentioned fully insured certificates of deposit as well as capital expenditures and patent application costs of approximately $845,000.

Capital expenditures included mainly production processing equipment in support of our continued growth and test equipment in research and development in support of our advanced product development and clinical study activities.

Cash flow from financing activities for the quarter was a positive $890,000 including proceeds from stock option and warrant exercises of approximately $1.2 million somewhat offset by $300,000 in share repurchases bringing the total amount of repurchases for the year to approximately $5.6 million.

And finally, we added 164 associates in 2014 to end the year with a total headcount of 386. In addition to direct sales associates we added staff in all functional areas in support of our growth.

Turning now to our guidance. The Company reiterates its previously announced full-year guidance of between $175 million and $190 million in revenue and an operating profit of greater than 15% and Q1 guidance of between $40 million and $41 million in revenue and in excess of a 10% operating profit. With that I will turn the call back over to Pete.

Thank you, Mike. Okay, we will open the call up to questions.

(Operator Instructions). William Plovanic, Canaccord Genuity.

So I appreciate the color on January and February in terms of how the business is progressing. Just one point of clarification, if you could. You said that it is tracking to your internal estimates. How does your internal estimates compare against your external guidance?

Bill, I would simply say that our external guidance has always been conservative.

Okay. Because I think -- okay. My next question and this is a basic one. Your -- how do we think about tax rate going forward? And then can you give me the shares for Q4, Mike?

Okay, so, in terms of the tax rate going forward, of course we have a valuation allowance on our deferred tax asset, there are specific rules in place as to when you can recognize that deferred tax asset. Obviously at this point we have not achieved that -- the basic requirement that allows us to reverse that valuation allowance.

If you were to think about taxes in 2015, based upon the fact that we have guided to a 15% operating margin, you can assume over the course of next year that -- 2015, I'm sorry, that we will recognize that deferred tax asset. But if you are thinking in terms of the book tax rate it can be anywhere from a credit of -- in excess of 3% to somewhere around zero. And as far as cash tax rate goes, we have looked at this and obviously there is a lot of variables that go into this but somewhere in the range of 9.5% to 12%.

I guess what I am trying to get at is once you do all the reversals and everything how should we think about your P&L tax rate from a GAAP reporting basis as we model out 2015 and 2016? It's just you are going to have one time reversal and then use a 40% tax rate, use a 30% tax rate. As we look at out years how should we think about it?

I would initially go with the higher rate in let's say 2016. Next year we will basically -- if you assume zero that is probably a good assumption. This is for book now.

Right, for [preferred] GAAP reporting. And then your shares in the fourth quarter, you only give us an annual. So can you provide the number of shares that you would use on a fully diluted standpoint?

Yes, let me get that number and as soon as I pull it up I will give it to you. So if you have any other questions or we want to move on to another question I will interject the quarterly shares.

Sure. My last question is obviously you are accelerating your hiring practice into areas outside of Wound Care into [Euro, GYNE], what have you. I take it your initial entrance into those markets went very well. How do we think about that addition -- are all the new adds going into these areas outside of Wound Care or are you still adding in Wound Care and then incrementally into Euro, GYNE, plastics, all of that? That is all I have. Thanks.

Yes, good question. Actually, we are still adding quite a few people into Wound Care, it's just not in the past last year it was almost all in Wound Care. We are splitting it up but we are still adding a lot.

Just as a frame of reference, in the fourth quarter of last year we have still only had penetration into the large Wound Care clinics like the Healogics, Accelecare, etc., of about 50% of their clinics because we just still don't have enough boots on the street in wound care in order to get full coverage.

So still got a lot of market share to take up in Wound Care, so a lot of our adds are still in Wound Care. So I don't know the exact number, but something like a quarter or so of our hires are being in those other areas besides Wound Care. And I think as this year progresses it will probably start growing as a percentage of the new hires. But that is probably the best estimate. I don't have the exact number, but that is probably reasonably close.

Bill, let me jump back in and answer your question on the quarterly share count. Basic is 106.3 million and diluted is 114.5 million.

Thank you.

Thanks, Bill.

Bill, let me mention one thing, this is Pete. We still have a lot of coverage to complete just in Wound Care. We have got secondary cities to fill out, we have got -- one example, and I won't use the city's name, but some places where we have one person and we really need three or four. So there is lots of coverage still to complete in just the Wound Care area.

Mike Matson, Needham & Company.

Morning, guys, this is actually Brad in for Mike. So just first off clarifying you guys are still selling the micronized, right, just not marketing? And is that a small amount of Q4 revenue?

To answer -- that question is correct, we are still -- the product is still in the market.

And then is there any clarification longer-term for the BLA time frame?

Well, the BLA is going to take us two to three years to complete, although we are quite ahead of schedule and we are making great progress. And all the conversation I had earlier about FDA, we hope to get some clarification here because of basically the whole industry and numerous other organizations getting very focused on the same issue that we have had to deal with basically on solo here for 17 months.

And to answer your other question, micronized revenue in the fourth quarter was 11%.

Great, thanks. And then the new products, so was that all four that you rolled out that you talked about at the Investor Day? Can you just talk about what segment they were in or any additional color?

We will give more color on the next call. I think we are just now rolling it out. We just don't want to give any additional heads up to our competition than what is necessary. We would like them to see what we have done in the market and then we will share with you in April.

Okay, fair enough. Sales through the distributors, can you talk about how Medtronic is going and when you would expect sales to Zimmer to start or sales from Zimmer?

Well, with Zimmer we expect I believe later this quarter/early next quarter will be our first shipment there, getting ready to do the product launch on that with them next month. So that is looking pretty good. And then on the Medtronic side, we continue to have meetings with them and getting their folks encouraged.

As you know, it got kicked off a little slower than I think either of our companies would have liked. But I think this year we are going to pick up some more momentum and build from there. So I don't know that we have mentioned the exact number, so we won't go there right now.

And are you expecting the Covidien acquisition to provide any sort of disruption there?

Actually, I think long-term it could give us some additional opportunity. But we don't anticipate any significant disruption.

And then last one for me. It doesn't seem like you bought that much share back in Q4. Is it safe to say that in Q1 it was at a bit more comfortable of a level and to expect more in Q1?

That is correct.

Great, thanks, guys.

Matt Hewitt, Craig-Hallum.

Good morning, guys, this is Dylan on for Matt. Kind of parlaying off the last question I'll just ask a couple. Cash balance, you guys have stated before it's going to be tough for you guys to spend the revenue overage moving forward. Repos were up to $20 million last quarter.

Are you guys looking to do anything other than that, M&A, any technology that interests you or internationally -- an area that wasn't touched on, building, buying and manufacturing facility across the pond? Kind of any color there.

First of all we remain inquisitive but we are not aggressive about it because we review new technology every two weeks here in some depth. We frankly have not seen anything that we feel is very compelling. Our technology is -- we should have conveyed by now we view as going to be used in numerous healthcare procedures.

It is a strong base technology and there is a lot of things that people bring to us and we see in the marketplace but most of those things are low technology. Our sales force are all very highly trained people in the physiology of wounds and those kind of things and we just don't see rolling up a bunch of ancillary products just to have a stronger presence in each of these facilities that we think that would be detrimental.

So we remain inquisitive, we are keeping our sights on everything that goes on in the space and at this point we haven't seen anything that is intriguing enough to make us turn that into an acquisition. We have done numerous acquisitions in our business activities over the decade, so I think we know how to do those effectively.

And when something shows itself we will move forward. At this point we continue to build cash and use it -- some of it as we have already demonstrated with the buyback of some of our stock when the time is right.

On the international front, Dylan, we have -- tail end of the last year and this quarter are starting to focus a lot more energy on the international front and we have uncovered a number of opportunities that we think are going to be very good for us.

In terms of expectations though, that will really help fuel our growth the back half of 2016 and in 2017 in terms of material revenues. We will do what we can to get some things happening before then. But, as you know, the regulatory process actually in a lot of those countries are actually longer than it is in the states relative to tissue.

Kind of a little bit backwards from devices where typically a lot of those countries are a little easier to get into on the device side than the states tissue is a little bit the other way around.

But we've got some several initiatives going on right now internationally and I think we will be able to start talking more about those later this year and you will start seeing some financial results coming into next year and the following year.

Okay, sounds great. And then kind of shifting gears over to end markets outside of Advanced Wound Care, you guys have stated in the past and on the call here that that is an important driver for you guys going forward. In your 2015 guidance is there a lot baked in from those other markets or are you guys just kind of all throwing it into the Advanced Wound Care bucket right now?

There is growth in our plan for this year. I don't know that we have articulated what that is. But there is growth baked into that and I think it will start accelerating throughout this year. If it goes as we anticipated by the fourth quarter it will have some very, very strong growth rates going into next year.

And what Bill is referring to is growth rates outside of Wound Care.

Yes. Wound Care will continue to grow strong, but I think you're going to see some good things in the surgical areas as the year progresses.

Okay. Okay, and then real just basic lastly from me. Gross margins, every quarter when I think that they've topped out you guys post another sequential and year-over-year increase. Have your expectations changed over the past couple quarters relative to peak margins moving forward? I know you guys give us operating margin, but just kind of wondering on that basis.

Dylan, this is Pete. We always tend to improve our operations week by week, month by month, quarter by quarter. And in so doing we've managed to continue to increase our gross margins even when some of the product mix would indicate it should go the other way.

I wouldn't at this stage be too concerned about any kind of significant drop in our gross profit margins. We expect it to be in this range. Over time there will be some decreases particularly as we step into the European area there is going to be some increases. But in the near-term we expect these margins to be fairly constant.

Dylan, if I could add something there, if you just look at the mix in the fourth quarter, obviously there was a very heavy mix on both the direct sales, the Would Care sales and on a percentage basis the Surgical, Sports an OEM were down. And that is one of the major reasons why you see a tick up of a percent quarter over quarter.

Okay, thanks. And congrats on another good year.

(Operator Instructions). Bruce Jackson, Lake Street Capital Markets.

Hi, guys, nice quarter. Okay, so you mentioned the randomized controlled study that you published last December with the cost-effectiveness data and that gave you a reason to approach some of the larger private commercial payers. Are you making any headway on that front?

I would say we absolutely are. But I will also say, as I have done many times, the reimbursement climate today is tougher than I have ever seen it in my decades of being in healthcare. And I've had a lot of experience in this area. And I know a lot of people that are executives at health plans and they have sort of battened down the hatches.

So it is very difficult for new technology to work its way through the doors of the chief medical officers and medical directors and into their committees and get some kind of acknowledgment that there is something new and better.

So we have been I think very astute at it, we have brought things along very quickly. We hope to make, in what I call the big five health plans, a lot of progress between now and mid-year. We've got one of those already, CIGNA, and we are trying to bring the other four to us.

And we have gotten and made a lot of progress with other health plans we probably have 55%, 60% of the covered lives out there written coverage policy on us. We hope by midyear to have that number up into the certainly 80% plus. So we are making steady progress and we work on it here every day. And I happen to be involved with it on basically a daily basis. So we are making progress but it is tough.

Okay. Then with the expansion into the surgical arena, you mentioned that the Euro GYN area is an area of focus for you. I am assuming that the prostate surgery application is one area that you are working on. Are there any clinical studies that are planned to publish this year to help support that effort?

Well, we just published one literally a few weeks ago. The first retrospective study came out of a Florida hospital and [Dr. Patel]. And we have got some prospective studies that we are about to launch along those same lines. But the results have been quite satisfactory to say the least. And a lot of -- quite a bit of enthusiasm from those physicians who do nerve-sparing prostatectomy's particularly with the da Vinci system over what the results have been.

And then are there any other applications that you are selling to in that market right now in addition to the prostatectomy's?

Yes, there are various other surgeries in the GYN space that we are just, just getting into right now. I don't have the exact procedures off the top of my head here. But we're really starting with the urology and the prostatectomy first. And those are kind of the thought leaders particularly in the robotic surgery area.

And if you follow the trajectory of those robotic companies, generally they start in the urology area and then over time the GYN area gets substantially larger with various procedures.

So basically any procedure where reduction in scarring is needed, enhanced healing and reduction of inflammation, anything like that. And there are a lot of adhesion problems with those pelvic surgeries and abdominal surgeries that we think we can help quite a bit with. So I think you're going to be pleased with the growth that we have over the coming year.

Okay, good. Then last question, on the FDA and the back and forth you have had with the transition letter just from a practical standpoint, what does this mean for your marketing efforts? I think that you were sort of trying not to arouse the ire of the FDA by marketing the product too aggressively. Is that still the case or do you now feel like you've got some more freedom to go out and be more aggressive?

Oh, I think when you have dealt with the FDA as long as I have over the decades I always respect them. They have their goals in mind and as industry we have ours in mind and we have to come together generally speaking.

We are just trying to get clarity. And we have had numerous experts give us advice over the last 17 months. Now trade associations and other corporations who know they are going to be affected by this same type of -- let's just call it confusion at this point -- are all chiming in.

So the good thing about it is we have got numerous groups saying the same thing we have been saying for 17 months trying to get clarity. And understanding why this happened to us as a standalone and nothing else has transpired along these same lines for 17 months until this request for additional guidance on this guidance document came out.

So we are looking forward to some clarity. Industry I think can deal with most anything as long as there is some logic and some clarity to it. It is when it is confusing and answers aren't coming forward and those kinds of things and that is kind of the situation we have been in.

So we are doing everything we know how to do, we have done everything the agency has asked us to do in terms of the IND BLA process and we have done it quickly and efficiently. At the same time we would like clarity on what -- where this is going and we would like to be certain that the agency's using their own regulations to make these changes. And that's how it goes.

So you won't see any significant changes in our behavior because I think we've done the right things and we'll continue to do the right things. But we hope to see some clarity come out of this fairly quickly and hopefully some public vetting and hearings on these changes and everybody understands why and the goals of the agency.

Okay, that is great. Thanks again, great quarter.

Thank you. I am showing no further questions. I would now like to turn the call back to Pete Petit, CEO, for closing remarks.

Well, thank you so much for being on the call. I hope it has been informative. And I can tell you that we look very much forward to reporting our first-quarter results to you in late April and that ought to clarify a whole lot of issues for us at that time. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.