MiMedx Group Inc (MDXG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MiMedx Group Q4 2015 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Mr. Thornton Kuntz, Senior Vice President of Administration. Please go ahead.

Thanks, Candace, and good morning, everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to risks and uncertainties. Actual results may differ materially from those set forth in, contemplated by or underlying the forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission including our Form 10-K for the year ended December 31, 2014, 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 and 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 good morning. I thank all of you for joining us for our 2015 year-end conference call. I have with me Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer, Chris Cashman, one of our Executive Vice Presidents and our Chief Commercialization Officer. There are also numerous other executives with us.

I'm going to make some comments about 2015, then some comments about our fourth quarter and then our outlook for 2016.

Considering the pricing headwinds in 2015 from expiration of the CMS pass-through status on EpiFix, we consider 2015 an excellent year. When you have a major product line that suffers over a 20% decline in its average selling price, that's generally very difficult to overcome. We overcame those issues with offering some other product innovations and improving the efficiency of our production processes. Thus, we actually improved our gross profit margins each quarter during the year. In the year, we ended up with an 89% gross profit margin.

We still had robust sales growth in 2015. In our Wound Care, sales grew by more than 50%, and most importantly, our Surgical, Sports Medicine, Orthopedics revenue grew by more than 85% in 2015. As you're well aware, we are very focused in this area now by hiring new sales personnel and with our acquisition of Stability Biologics. In the years ahead, we expect our SSO revenue to grow faster than our Wound Care revenue as it catches up in overall revenue dollars.

We continue to manage our profitability well. Our 2015 net income of $29.4 million represents a 373% improvement over 2014. I would say that's a very nice improvement. We had a full year adjusted EBITDA of over $44 million, which represents 113% improvement. In 2015, our net income was approximately 16% of revenues and our adjusted EBITDA was approximately 23% of revenues. While we discussed significant improvements in those margins for 2016 and beyond, these are still outstanding results that few companies can emulate.

Our fourth quarter results represent the 17th consecutive quarter of meeting or exceeding revenue guidance. Again, very few young companies can match that type of stable forecasting. Of course, we need to integrate Stability Biologics and be certain that we have excellent insight into their capabilities and abilities to forecast their revenue and profitability like we have ours. With our assistance, we think we'll have those issues well under control certainly in the second quarter. We have only had about 40 days of combined operations at this point. We're making rapid progress in this integration, but doing an integration of this nature correctly takes some time. Now please recall that we've done this numerous times in our former business activities.

You should certainly take note of the improved profit ratios in our fourth quarter. Our net income increased 26% of revenues. However, there was a onetime increase included as an income tax benefit due to the release of our net operating loss valuation allowance. Mike Senken will discuss that in more detail. Our adjusted EBITDA was 25% of revenues in the fourth quarter. These trends are certainly in the right direction.

As a reminder, I've encouraged shareholders to focus on our gross profit margin and not operating profit margins. That is because the gross profit margins are the most difficult to control because there are external forces that corporations do not control such as pricing, which is what we went through in 2015, and international currency fluctuations since we're now selling internationally.

We make the decisions that control the operating profit margins. If we see investments that can give us significant returns on the investment, we have told you we'll take advantage of those investments. At this stage of our company's growth, we get significant ROI on the majority of the investments we make. While they take away from current operating profits, these investments generally have a very positive return measured in months rather than years. So be patient with us as operating profit margin move around a bit. You can be guaranteed we made a significant investment that will pay off very quickly.

Now let me provide some insight into our views on 2016. This will be the year where our focus on the Surgical, Sports Medicine and orthopedics revenues will become very evident. Our sheet allografts and pure amniotic fluid have some interesting opportunities in this area. We're adding direct sales personnel at a rapid rate and also now have added the added benefit of Stability Biologics' independent sales reps and their distributor groups. In addition, in 2016, we will be introducing a number of new products. MiMedx will offer some products that we've not previously discussed because of competitive reasons. These products will find opportunities both in Wound Care and in the SSO area.

In addition, we have Stability Biologics products, which we've previously discussed. These include their Physio product. Physio is an innovative bioactive bone graft that will enhance the healing of bones. It has logistical advantages that are similar to those of the MiMedx product lines. In addition, Stability has a line of tissue allografts including particulate bone, structural allografts, demineralized bone metrics and skin products for burns and complex wound care.

There are some significant synergies between Stability's surgical products as well as ours. We expect to see these synergies develop as we get into the second quarter and beyond.

In the burn area, Stability will be supplementing our amniotic tissue allografts with a lower-priced skin product that can be used to cover large areas for second and third-degree burns. Our allografts are finding effective use on face and around joints where aesthetics are important. Stability products will be clinically and cost effective for large areas of torso and limbs.

As we currently view 2016, I think we can drive increasing revenue quarter-over-quarter. We're certainly going through the normal value of committee approvals for new products at hospitals, which slows all these processes down. However, we're in the process of leveraging our group purchase organization or GPO contracts for the Stability products and some of our new products.

Speaking of GPOs and the related IDNs, which are integrated delivery networks of hospitals, we have a very significant advantage over our competition because we're a clear industry leader and we pursue these contracts beginning several years ago. They've proven to be very effective as we implemented coverage from all the covered hospitals.

MiMedx will continue to build all the foundational elements associated with our leadership and the regenerative medicine aspects of amniotic tissue allografts, our collagen fiber grafts, the Stability Biologics bone grafts and other technology. This includes continuous and rapid additions to our [PAT] portfolio, the rapid and effective conduct of randomized controlled trials and other clinical studies and creation of solid infrastructure to support our relentless growth profile. All those foundation elements continue to progress at a rapid pace. Therefore, what you can be assured that if a strategic partner [suited] has become interested in MiMedx [with] all the key elements effectively in place.

Let me address one other issue that I know is always of interest, and that is how we view the regulatory status of tissue products of the Food and Drug Administration. Well, you all know there will be a meeting on April 13 that will last for at least a day with testimony from industry physicians, scientists and patients on the subjects of homologous use in minimal manipulation.

Among other subjects, I believe the industry will be inundated with strong regulatory and scientific commentary on these subjects. I think the FDA will necessarily react in ways that will be conducive to making the right decisions based on the regulations and laws. I believe the Senate's closure vote yesterday on the confirmation of Dr. Robert Califf as the new FDA Commissioner is beneficial, and his confirmation should be a major step in improving communications with the industry and the process associated with giving industry clear direction on the regulations.

While the confirmation of Dr. Califf -- or with the confirmation of Dr. Califf, I'm optimistic that positive change will take place, particularly related to the way the untitled letters of guidance documents are managed. We continue to work with agency in every way we know possible on those issues. At the same time, we've spent time with congressional leadership as have numerous, numerous other corporations and trade associations to help them understand the confusing ways that some of these directives have been conducted. There's no question the congressional members and their staff understand the problems clearly. Therefore, I have an optimistic view that the hard work and communication of numerous groups will help bring order to what has been a rather difficult process.

One other question I've been asked numerous times lately relates to our current valuation. The answer to that is very straightforward. I feel strongly that MiMedx is currently undervalued at this point. MiMedx stock has traded down since August. Unfortunately, we're part of a number of exchange traded funds and other index funds, and they've all traded down significantly since August. The uncertainty related to China, oil prices and the international economic situation has caused significant concerns with investors. Although these issues really did not affect health care and particularly biotechnology companies directly, they reduced the risk-taking capacity of large institutional investors, and they exit to what they consider safer equity.

If you track the XBI and the NBI funds, you will see how closely we do track these funds than whole mid-cap biotech companies. Going through a period of this nature where our company is certainly performing in the top 5% of all the companies in those funds, you just have to be patient. MiMedx is an exceptional performer, and very few companies have similar growth rates in revenues and profits as we do. So I've been the CEO and Chairman of public companies for 34 years. I can simply say that more often than not, proper valuation will generally be achieved with patience and perseverance is the key.

With that, I'll turn the discussion over to Bill Taylor, our President and Chief Operating Officer. Bill?

Thanks, Pete. 2015 was a transformative year for MiMedx. We continued to significantly grow our regenerative biomaterial platforms organically as well as earlier this year by acquisition. Our Wound Care business grew by over 50% compared to 2014, even though our ASP for commercial Wound Care was reduced by about 24% for the year due to the changes with expiration of pass-through status for EpiFix.

Let me say that in a different way. After a 24% average price decrease in our biggest product line, we were still able to grow our market share in terms of revenue dollars, take business from competitors, grow the market and increase our year-over-year revenue in this business area by over 50%. We managed this transition, as we told investors we would, and the results were as we anticipated.

On the SSO side, our Surgical, Sports Medicine, and Orthopedic business, we continued our strong growth by growing about 87% above our previous year's total and had about $46 million of revenue. This growth was driven by our abdominal and pelvic surgery focus as well as our new product introduction of OrthoFlo, our amniotic fluid product, among other things. Also, in looking at our revenue of commercial versus federal, our commercial business grew by over 75% and our federal business grew by over 20% year-over-year. So we had strong growth in both of our areas.

We continue to invest in our sales force, and we've grown to be around 240 people today. And we've targeted and identified candidates for over 15 or so account executive positions. We should be well over 250 people shortly, and we continue to hire sales reps in all of our sales channels, but an added focus is in the surgical area, the abdominal-pelvic surgical area.

On the sales front, I also want to briefly mention something about GPO and IDN contracts. IDNs, or integrated delivery networks, are groups of hospitals that have the purchasing contracts integrated to get more economies of scale. Fortunately, these IDNs are also affiliated with group purchasing organizations or GPOs. We've been very transparent with shareholders regarding our GPO and IDN contracts. Now as we mentioned previously, we have contracts with GPOs and IDNs that, in a significant portion of those, have volume commitments tied to our products. Recently, one of our competitors stated they signed a GPO contract indicating that it gave them "access" to certain sets of IDNs, while access does not mean that they have a contract with those IDNs.

For example, a company could contract with a GPO ABC and have access to x number of IDNs under that GPO contract. That means they can approach the IDNs in ABC's network. However, what this competitor will find is that MiMedx is already contracted with those IDNs and our contracts generally have commitments to purchase a certain percentage level of MiMedx products in a given category, generally in the 80% or so range. That means that competitor who has "access" will have trouble breaking into any meaningful sales in these IDNs we've already contracted with MiMedx.

Our changing focus to IP. In 2015, we were issued 15 patents in the U.S., six of which were related to our amniotic tissue and nine related to our CollaFix technology. This brings our total issued patents to 54, 34 of those are for CollaFix and 20 for amniotic tissue. We also have five allowed but not yet issued for amniotic tissue and two allowed but not yet issued for CollaFix.

So also, related to our patent lawsuits, recall that we have three of these lawsuits ongoing. Two of the defendants have filed for IPR, or inter partes review, to challenge the patents. And as you know, our key configuration patents for EpiFix and AmnioFix were denied IPRs, and that speaks volumes to strengthen these patents. An IPR is a relatively new process in the patent world that was designed to bring quicker review of patents that are questioned, as performed by a small panel of judges with a high level of patent law expertise.

Now our third case is also moving forward. The defendant filed a motion to dismiss for "lack of patentable subject matter," but the court ruled denying, in part, the most important claims, so the case is moving forward.

Now I'd like to take just a few minutes now to acknowledge some of MiMedx team accomplishments. We covered most of them in our national team meeting a few weeks ago, or also our national sales meeting. Sustaining growth at the level we've been performing creates a significant strain on any organization, and they need a strong element of teamwork and strong leadership to prevent issues from negatively affecting your business. System and procedures that work well for $50 million company are not sufficient for a $200 million company. You must continuously evolve and redesign your systems to effectively manage it. You've seen our 58% revenue growth year-over-year and 50% Wound Care growth in the face of 24% price decrease and our over 85% growth in SSO. And also, as you know, in 2015, MiMedx became the market leader in the biologics area of advanced wound care, and we expanded our number one position in amniotic tissue.

Some of these team accomplishments that helped us achieve those things are as follows: We processed almost 80,000 orders in customer service, which was about 100% increase in orders compared to 2014. We implemented over 90 new electronic training modules created by our training department. They're very sophisticated training modules. We went through nearly 1,000 contracts through our legal department. We had over 200 national and regional conferences that we attended. We had over 600,000 marketing materials were ordered and distributed. We increased our placenta collection and processing by over 60% compared to 2014. We had an over 99% on-time delivery record. We had 15 patents that were issued. We published the [industry?s] first ever primer on amniotic tissue. We hired and on-boarded over 200 people, about a 50% increase. We expanded insurance coverage to 255 million covered lives. And we had an almost 60% revenue increase related to our GPO contracts.

So these are just a few of the very complex and critical accomplishments from our team in the past year. I hope you can understand the challenges underlying these accomplishments. It's not easy, but I'm routinely amazed at how many times our team makes it look easy, even though it is far from it.

So turning now to Stability Biologics and our integration efforts, and we'll hand it over to Chris Cashman, our Chief Commercialization Officer, and he'll give you some details.

Thanks, Bill. We are now just about five weeks out from the merger completion between MiMedx and Stability Biologics. A great deal has been accomplished. First and foremost, there is no doubt culturally that this is a terrific fit. The team at Stability Biologics is of high integrity, great passion and very hard-working. This is a nice fit relative to the speed with which we work and interface to get things accomplished here at MiMedx.

Training has been a very big part of the activities over the last few weeks. We have trained the internal teams and managers of both organizations on product portfolios. We also had the opportunity to include the SB team at our national team meeting, which is our natural sales meeting at the end of January into early February. We conducted a great deal of cross-training and cross-selling activities. We also capitalized on the time together to conduct in-depth reviews of our sales networks. Very valuable initial planning, strategy, targeting and process and people integration occurred at that time. We continue to work the plan a cross-selling coming out of that meeting through February. We now are engaged in training the many Stability Biologic agent and distributor groups nationally on the new product portfolios.

It is clear that the specialization focus for our surgical initiative has been strengthened. Both the expansion of the sales network as well as the combination of product portfolios puts MiMedx in an enviable position to grow revenues and become a more meaningful provider in surgical specialties.

Certainly, Physio, the new bone product by SB and the combination of our AmnioFix product line are a good combination in spine specialty. We have also found that our strong position in Wound Care with our 200-plus sales reps leveraging our wound and surgical focus there, leverage with the agent networks of both organizations makes us a formidable future player in the foot and ankle surgical market. The product portfolio now is further strengthened with traditional bone allografts, DBM products, Physio and our AmnioFix product line.

We also believe that OrthoFlo will benefit from the expanded sales network and specialty focuses as well as the SB burn product AlloBurn, which is a very good complement to the EPIBURN product. The lead burn centers use a lot of split thickness skin in order to create coverage for very large burn areas. AlloBurn, we have found, will enhance penetration and utilization possibilities in these centers. EPIBURN, while still being applied in extremities, face and neck, where aesthetic and increased quality of healing are required, will also benefit from utilization in combination with AlloBurn for large burn patients, as they progress to smaller areas in the continuum of the healing process.

The Physio product has been utilized around the country in a number of cases, and early returns have been very positive. The performance measures up to early billing and having outstanding wet-field and handling integrity. We're excited about this product. We're also very focused on the further scientific and clinical studies to be conducted that will provide the proof of Physio performance.

Just as we've done with our Wound Care portfolio with clinical and scientific research historically here at MiMedx, we've had our initial meetings internally to integrate the possibilities and knowledge regarding all of these products. We are in the product development and clinical research process now planning the expanded use pipeline and, for further rationalization and budgeting, for specific research and clinical trials that will further expand the opportunities for these product lines.

And finally, we will be attending the American Academy of Orthopedic Surgeons or AAOS during the first week of March and are looking forward to our first introduction of the combined product portfolio to this audience.

Now I'll hand it over to Mike Senken, Chief Financial Officer, to go through the fourth quarter and full year 2015 financials.

Thanks, Chris. My comments regarding revenue results will be brief as they were previously reviewed on the January 11, 2016, shareholder call. And actually both Pete and Bill in their prepared comments today spoke to some of the detail around revenue.

The company recorded revenues for the fourth quarter of approximately $51.8 million, an increase of 31% or $12.3 million over prior year fourth quarter revenue of $39.6 million. We added approximately 400 new customers in the fourth quarter. For the 12 months ended December 31, 2015, reported revenues were $187.3 million, which represents an increase of 58% as compared to prior year.

Gross margins for the quarter were 90.4% as compared to 90.9% in the fourth quarter of 2014. A slightly higher gross margin in the prior year was due to a higher mix of Wound Care versus SSO sales, driven by the pending expiration of pass-through status as of the end of 2014 for EpiFix. Gross margins for the year were 89.2%, which are virtually the same as prior year. The improvements in gross margin since the beginning of the year reflect the successful transition to the mesh configuration that was launched in mid-February to address the expiration of pass-through status for EpiFix.

R&D expenses for the quarter were approximately $2.3 million or 4.5% of quarterly revenue as compared to $1.8 million in the fourth quarter of 2014. On a year-to-date basis, R&D expenses were $8.4 million as compared to $7 million in 2014. The increase is driven primarily by increased investments in clinical trials.

Selling, general and administrative expense was approximately $36.5 million for the quarter or 70.5% of quarterly revenue as compared to $29.2 million or 73.9% of quarterly revenue in 2014. During the quarter, we added 16 direct sales reps, and on a year-to-date basis, have added 65 direct sales reps, bringing the total direct sales headcount to 233 at December 31, 2015.

On a year-to-date basis, SG&A expense totaled $133.4 million or 71.2% of revenue as compared to $90.5 million or 76.5% of revenue in 2014. The year-over-year increase in SG&A spending was due to the continued buildout of our direct sales force in both Wound Care and surgical markets, new product launch costs, additions to the reimbursement team and other support areas as well as increased legal costs, primarily related to our patent lawsuits.

The company reported a positive adjusted EBITDA margin of 24.8% or approximately $12.9 million for the quarter ended December 31, 2015, which is an increase of $4.4 million as compared to an adjusted EBITDA of $8.5 million in the fourth quarter of 2014. It is the 16th consecutive quarter of reporting positive adjusted EBITDA. Included in our press release today is a reconciliation of adjusted EBITDA to reported net income. The improvement is driven by increased sales volumes and corresponding operating leverage. For the 12 months ended December 31, 2015, adjusted EBITDA was approximately $44 million or 23.5% of revenue as compared to $20.7 million or 17.5% of revenue in 2014.

Operating income in the fourth quarter was approximately $7.7 million or 15% of quarterly revenue, which represents an improvement of 67% or $3.1 million as compared to operating income of $4.7 million in the fourth quarter of 2014. Operating income for the 12 months ended December 31, 2015, was approximately $24.4 million or 13% of total revenue as compared to an operating income of $7.1 million or 6% of revenue in 2014.

The company reported net income for the fourth quarter of approximately $13.4 million or $0.13 per basic and $0.12 per diluted common share as compared to net income of $3.8 million or $0.04 per basic and $0.03 per diluted common share in the fourth quarter of 2014. Fourth quarter net income included a net credit to income taxes of approximately $5.7 million due to the release of a substantial portion of the valuation allowance on deferred tax assets. Year-to-date, net income was approximately $29.4 million or $0.28 per basic common share and $0.26 per diluted common share as compared to year-to-date net income of $6.2 million or $0.06 per basic and $0.05 per diluted common share in 2014.

Turning now to the balance sheet. The company reported approximately $96.3 million in total current assets, including $28.5 million in cash, $3 million in short-term investments, which are comprised of fully insured and liquid bank certificates of deposits, $53.8 million in accounts receivable, $7.5 million in inventory and $3.6 million in prepaid expenses and other current assets.

Day sales outstanding for the quarter were 93 days as compared to 86 days at the end of the prior quarter. The growth in DSO was driven by continued rapid expansion of our customer base as well as realignment of our network of distributors. We continue to add collections and field reimbursement staff to improve collections performance, especially with new customers.

Inventory turns were 2.7 for the quarter as compared to 3.5 at the end of the prior quarter. The increase in inventory was in line with our production plan, as we added new SKUs in support of planned SSO segment growth.

One other note regarding the assets section of the balance sheet. With the release of the valuation allowance in the fourth quarter, we now have a deferred tax asset of approximately $14.8 million included in noncurrent assets. Current liabilities were $26.8 million as compared to $24.4 million at the end of the prior quarter, with the increase in line with the growth in the business.

Turning now to the statement of cash flow. The company reported positive cash flow from operating activities of approximately $4.4 million for the quarter, driven mainly by an increase in adjusted EBITDA, somewhat offset by increased working capital. Cash used in investing activities includes $1.7 million in fixed asset purchases, including purchases related to the continued expansion of our tissue-processing capacity as well as our IT infrastructure and production-related activities for CollaFix.

Cash flow used in financing activities for the quarter includes $19.2 million for share repurchases somewhat offset by the proceeds received from the exercise of stock options. The company repurchased approximately 2.3 million shares in the quarter under the share repurchase program bringing the cumulative total to approximately 5.5 million shares repurchased under the plan from the inception of the plan in 2014 through year-end.

And finally, we added a total of 44 associates in the quarter bringing our total headcount to 544, which represents a 41% increase as compared to December 31, 2014.

And turning now to our guidance. The company reiterates its guidance of between $55.5 million to $58 million in revenue for the first quarter, an annual revenue guidance of between $260 million to $270 million. The company is also guiding $0.33 to $0.37 in adjusted earnings per share.

And finally, MiMedx will be participating in the RBC Capital Investor Conference in New York City tomorrow and will be presenting at the Canaccord Genuity Conference next Tuesday in Orlando, the day before the AAOS conference. Please check the Investor Relations page on our website for further updates.

With that, I will turn the call back over to Pete.

Thank you, Mike. Well, let's open the call for questions and answers, please.

(Operator Instructions) And our first question comes from Matt Hewitt of Craig-Hallum. Your line is now open.

Good morning gentlemen. Congratulations on the strong execution. A couple of questions. First, you gave us a couple pieces on the headwind that you were facing last year as far as -- what was it, 24% headwind on ASP? Could you quantify what that was, I guess, looking back at the year, what that represented to the revenue line? I think early in the year, you had given us some detail thinking it was going to be in the 6% to 8% range. But looking back now, what did that end up shaking out at?

Yes, okay. So on this one, the 6% to 8% that we were talking before was with our previous price structures and the number of grafts that were in the -- that were larger grafts above the bundled rate that were in Medicare population. So if you remember, what we did, though, to address this to make sure we had deeper penetration was to add more SKUs. We changed the pricing on a number of the SKUs such that we had a number of grafts that were at or under the bundle. We added several mesh sizes that were at or under the bundle, which on an average price per square centimeter basis significantly changed those numbers. So not exactly an apples-to-apples comparison because of all those changes we did.

And now we have probably, I think, we can cover in the neighborhood of 90% of the wounds in chronic wounds with products that are at or under the bundle. So it was a kind of change in philosophy in the way that we were looking at this to capture more of the wounds in case some of the facilities did not accept the cost of closure argument of using more expensive graft early on and then less expensive ones later as they're getting smaller. But overall, we had a substantial increase in the number of units that were sold far more than that -- than what our revenue actually shows from a unit perspective.

Okay, yes. I wasn't sure if there was going to be -- if there was the ability to do an apples-to-apples comparison, but obviously, with all the new products and some of the changes you were able to make, you could pick that up with the volume.

Shifting gears a little bit, you've continued to add sales headcount at a robust pace. Now you're starting to add on the SSO side, which makes a ton of sense. Where are you finding these candidates? Is it a similar strategy as you rolled out the Wound Care sales force as far as finding the top-notch deep rolodex type people? Or are you looking for more specialized folks that can really go after a specific segment of the market?

Yes. Matt, it's Chris. We're very focused on the specialization. The opportunity in our position affords us to go after the -- opportunistically after the top people that are in the field to be in line with the way that we've always worked, clinical and scientific experience, and ability to speak that language is very important. So our profile hasn't changed. As we move into the SSO area, it's very important that we get people with deep experience but also match our kind of our [culture] and our work ethic and our commitment to science and clinical.

So those individuals can come from a lot of different backgrounds, a lot of different type of companies, but they're certainly going to have very specific knowledge to the markets they're calling on.

Okay. One last one and then I'll hop back in the queue. Could we get an update on the international opportunity, where that sits today and what your expectations are for this upcoming year?

Sure. We've actually been, I think, growing that business quietly, and we do expect this year that we're going to have sizeably more revenue than what we had in previous years. I don't want to go into a lot of detail until we're a little farther along on that, but we are in several countries in Europe and a few other geographies as well right now growing and building those sales. There's a number of other companies like Japan and a few other countries that we are focused on, and I think we can get into fairly quickly.

If you recall, in 2014, I believe we'd said that our international was less than 1%. I think in 2015, we increased that to the neighborhood of 3% or thereabouts. So we've tripled it in '15 in terms of a percentage of our business. So it's sizably bigger in terms of revenue. This year, we expect to grow even more than that, but I don't want to throw out a number just yet.

Fair enough, all right. Thank you.

Thank you. And our next question comes from the line of Mark Landy of Northland Capital. Your line is now open.

Thank you. Good morning, folks. Pete, I guess, a question just off of that for you. On the 18th, which is Thursday last week, the federal register -- the FDA updated the Federal Register to upregulate metal-on-metal hips and the articulating surfaces from essentially, I guess, grandfathering 510(k) to PMA. That process took from the open meeting about three and a half years. Assuming the rules for upregulation of a product across the divisional borders, so from [SIBER] to [SEDAR]. Is this the expectation that we should have for any changes to the current HCT/P guidelines? You talk about the FDA, having to follow their rules and regulations. Is this the kind of time frame that one should think about with respect to any changes that could be made versus the immediate effect of these untitled letters?

Mark, I think that's a good example and there's numerous more that you could cite. When the agency decides that they want to upregulate an area, change regulations, it takes a process that's going to last in that vicinity. And I think, again, knowing a bit about the meeting that's coming up on April 13, there's going to be a significant input from industry and physicians, patients, et cetera. And I expect the process of that nature will probably begin.

Yes. I bring it up because it is the latest updates of the Federal Register for an upregulation of a product. [I guess] moving on.

I guess for Chris -- Chris, I know you're very excited and you highlighted the opportunity of a combination of Stability, specifically in burns and in also your growing business in foot and ankle. I know that you don't break out the burns revenue, but adding the Stability product to your burn portfolio, could you give us a size or just kind of a qualitative kind of outline of the size of the additional impact that you could get from Stability? Could it double the revenues, triple the revenues, increase the revenues by half?

Specifically to the burn product?

Correct, yes.

Well, I think -- this is off the top of my head. I think from a burn aspect and inpatient, there's probably somewhere around, for initial primary diagnosis, 50,000, give or take, some patients that are in the hospital for trauma or burn.

As you may remember, EPIBURN, obviously, is a premium product -- premium price product, has incredible healing aspect, but it is not -- because of the price point, it can't be used on full torso and very, very large burns on the body. It has been used very effectively in areas that it's either for function like on the hands and extremities and in areas like the face, neck for aesthetic reasons and also for better healing and integration.

What is interesting about the AlloBurn product from Stability is it's a split-thickness graft -- skin graft that allows us now, at the appropriate price point, to be more effective in creating greater coverage and obtaining those patients early on. And then, of course, as those patients progress and the healing process progresses, there's going to be opportunities where EPIBURN is absolutely perfect for the final stages of that healing and skin epithelialization. So again, we're in the early throes of it, but we're excited about that combination and having a more stronger, broader portfolio.

So then there really is two benefits, the opportunity to get the patient earlier, and then maybe opportunity to grow the revenues in patients that you weren't able to treat. Is that correct?

Yes, that's correct. And it just gives us a greater footprint. I mean just from the breadth of product, we're only in the early stages of even introducing EPIBURN within the last year or so, 15 months. So this just gives us greater reach and greater portfolio.

So does this double the opportunity for your burns portfolio? Could you give us some sense of the size increase that the combination could have?

This is Pete. Well, I think what this does is just give us a much broader product line and a much stronger presence in all these centers. There is a -- Integra has a strong presence there. Now we think we're going to have the same width and breadth of product line that they have and probably we think products that are going to perform better. So if you can, you might take a look at -- if it's possible to get hold of some of the Integra burn performances and see what we might be aspiring to. But I suspect -- it's certainly our goal to see that we increase -- we use double and triple numbers and that we would think that's probably certainly reasonable. Most of the hedging [has] been going up and down.

Most patients now -- or now have an opportunity to benefit from the AlloBurn product. So that's an incremental growth opportunity.

Okay, fair enough. And then just moving on to the other highlighted area was foot and ankle. That is one of the high-growth areas in orthopedics that a lot of the larger orthopedic players are counting as growth opportunities for the future. Could you just give us just a broader sense of your current footprint in the foot and ankle market, as you focus on podiatrist and perhaps how the -- how you could benefit from the increased focus on foot and ankle moving into the surgical podiatrist and impacts into the higher-end podiatrist with respect to the use of your product versus them moving forward with respect to treating more complicated surgeries?

Sure. Well, for sure, our Wound Care group, which is in excess, as we said, of 200 account executives now are very focused and work day in and day out with a podiatrist. And so that's an area that we're very well engaged, and, of course, a significant portion of foot and ankle surgery is done and performed by podiatrists. Not to mention the combination now of the Stability network as well as our own current agent and distributor network that we already had in place, we've really got a great -- very specialized focus in the foot and ankle area. And that we think that we can leverage those relationships in that whole body of network in order to drive deeper.

Now what the other plus is through this acquisition or this merger with Stability, our whole portfolio is rounded out. When you look at our foot and ankle product portfolio today, we have our core competence in AmnioFix and the micronized product lines, but we've also ordered OrthoFlo. We've added that because of the [lubricious medicine] that -- anti-inflammatory products in that. We also have added just recently and introduced at the [AgFest] meeting 1.5 weeks ago, our amnio cord product, which is an umbilical thicker graft, and that will be used where you throw a stitch through it and it can be used in foot and ankle surgical procedures. And then, of course, the Physio and DBM products are going to be very applicable to the foot and ankle surgical procedures.

So all of a sudden, now we've got a pretty formidable product portfolio and a network that is very focused in this area.

So the cross-selling opportunities between the podiatrist and the surgeons become that much greater, correct, by adding the Physio and the DBMs?

There's no doubt. And these are not me-too products. These are enhanced healing. They're cutting-edge technologies. So again, that even creates greater interest from the users, if you will, or providers.

And then just the last question for Mike. The pickup in gross margin, Mike, this quarter, is that just due to volume and mix? Or was there something in there, pickup, a sequential pickup?

It had to do with product mix.

Okay. Thank you very much. That answers my questions.

Thank you. And our next question comes from Mike Matson of Needham & Company. Your line is now open.

I guess I just wanted to start with the breakdown between the government commercial sales. I'm sorry, I think you said the numbers, but I just want to make sure I got it correctly. Did I hear that the government sales were up 75%, commercial were up 20% or --

The other way around.

It should be the other way around.

Okay, but those numbers are correct. I just have it reversed?

That's correct.

Okay. And then just looking at the sales force overall, I guess I just want to make sure I understand kind of how things are organized now that you've bought the Stability company. So you obviously have a big part of your sales force that covers the Wound Care opportunity, and I know you had started to develop some dedicated surgical reps. And now you've added Stability, which is really more of, I guess, seems to be an orthopedics focus, maybe there's some burn business as well. But I mean, is that the three kind of legs of the stool that you have there in the sales force? You have dedicated wound, dedicated surgery as in non-orthopedics and then dedicated orthopedics reps? Or is there just more overlap between the surgery and orthopedics now?

Yes. Let me just hit that, and Chris can fill in if needed. So we, for the last several years, had -- the Wound Care was direct reps. And then in the SSO business, we had basically a team that managed our sales agents and distributors. Then as we started building our abdominal and pelvic, our surgical group, we started adding more direct reps there as well. So in SSO, basically, we have the direct sales organization for abdominal and pelvic, and then we have the management team that manages our sales agents and distributors. And we added -- when we added Stability Biologics, that added some sales management that managed their 100 distributors and sales agents that they brought to the table.

So the three groups are the right way to look at it, but direct, there's only one portion of our SSO that we have direct reps, obviously, our Wound Care as well. And then the indirect is under the SSO bucket relative to sports medicine, orthopedic and spine.

Okay. if I could, the only thing I would add to that is on the spine, orthopedics, sports medicine side, we also have regional directors as well as specialists, the market development managers that work with these agents and distributors, whether it's training or being involved and managing those groups.

Okay, and then the 100 new reps from the -- what products? I mean, are they mainly focused on orthopedics? Or are they going to be selling into other types of surgery as well, like the general surgery and gynecology and things like that?

Predominantly, they have always been spine-oriented and orthopedic. There are groups that also do sports medicine, and certainly, some of that is -- some of the focus is also abdominal and pelvic. But I think the right way to think about it is they're more orthopedic -- main orthopedic and spine.

Okay, got it. And then just on OrthoFlo, how do we think about that product, the potential sales, given that you don't really have reimbursement coverage and it's competing in a category where you -- with HA products, there is insurance coverage? So I don't know what the pricing differential is, but how big of an opportunity can that really be without some sort of coverage?

Well, I think there's a significant opportunity. I think you do hit on a key point about obviously long-term coverage and reimbursement, when you're talking about the offices and pain and sports medicine uses. Nevertheless, OrthoFlo is different. OrthoFlo with its intended uses, it has inflammatory modulators. It has growth factors. It has HA, which of course, is a significant constituent to the synovial fluid. And so OrthoFlo is different. The pure amniotic fluid is definitely different than what hyaluronic acid is doing for that HA market, which, quite frankly, also is about $1 billion on those so -- in the U.S.

So when you think about that, there is an elective opportunity. In price right and with the constituents and the characteristics of OrthoFlo, we think that we can still be successful there.

I think, secondly, it's important to understand that there's other areas within the body where protection and lubriciousness and inflammatory modulation is important. And one area you can think about is passage joints where synovial fluid runs through. So we want to get better lubricity within the spine area. So there's other opportunities as well that maybe more hospital-based.

I'd like to add, too, remember the strength of our reimbursement group and how we went through reimbursement and other areas of our business? Obviously, that's an area that we're looking hard relative to OrthoFlo and are working on a plan to put that into place. I'm not sure I can tell you how long it will take to get that, but we -- obviously, I think, based on our history, we've shown that we can make reimbursement happen as fast or faster than other folks in the industry. So we'll be looking at that as well.

Okay. That's all I have. Thank you.

Thank you. And our next question comes from Joe Munda of First Analysis. Your line is now open.

Good morning, guys. Thanks for taking the question. Pete, I want to go back to comments you made a while back here following the Stability acquisition. The company is moving aggressively into the orthopedics space with -- by adding their products. Are your thoughts still against adding hardware or implant products (inaudible) based on the fact that a lot of the competitors you're going to be coming up against have a full suite of both hardware and biologics?

Joe, I don't think you'll see us step into hardware. We are a biologics-focused organization on regenerative medicine. Your point you're making, though, is valid and that's why these sales -- independent sales rep organization is so important to us. Generally speaking, many of them have metal, that's -- and their presence in the operating room is because of the metal they're carrying in there. At the same time, they're looking for a biologic to piggyback on the metal and we're an ideal -- a very ideal solution for that. So that's our approach. And I just don't think you'll see us stepping into the metal area.

Okay. That was helpful. In addition, I guess, piggybacking a little off of that somewhat, any updates on the relationships with both Zimmer and Medtronic?

Well, probably all three of us could comment on that, even Mike. As an organization that's grown extremely rapidly, that's always taxing on a management team. And frankly, we've said this before, we just haven't had the time from our end to spend probably the committed time with them that would have improved things somewhat. On the other hand, they've had their hands full with the integration of acquisitions, et cetera.

We've got, and I've discussed in focus this year that we put one of our sales executives, strictly giving them responsibility strictly to work those two relationships, something we hadn't had until just recently. So we think they're powerful organizations. They like our products. We just haven't had time to get focused to do some of the things that we'll be doing in '16. So we hope we get to bring those two relationships into a more productive fashion here with us.

Okay, I guess my final question -- Bill, it's for you. As far as the sales force is concerned, I think you had mentioned in the past, you were at 240 right around time at JPMorgan and you had mentioned, I think, adding 80 reps possibly in 2016. Is that still the -- I guess, the goal? Or has that changed?

I think we've said somewhere in the neighborhood of 70 or 80 for the year, and (inaudible), I?d say that still looks good. Obviously, as we go through the year, that might get updated a little bit, but that's where I'd say we are right now.

Okay. And in terms of how that -- just out as far as wound versus surgical, any help there would be great.

We'll definitely be adding across all of our business areas, but I would say that a higher percentage of growth is going to be in that SSO or mainly our directs in the surgical area. That's one area that we really want to build up this year. But that said, we still have some room to grow on the Wound Care area. We still have a lot of pockets where we don't have good coverage. We have a lot of larger cities where we just want to get deeper penetration. There's still several secondary cities that we need to get into that we're not into just yet. But from a percentage growth of the sales force is, I think, the SSO group is going to grow faster than Wound Care group.

Thank you.

Thank you. (Operator Instructions) And our next question comes from Bruce Jackson of Lake Street Capital Markets. Your line is now open.

Hi guys, nice quarter. So getting back to OrthoFlo. Can you give us a rough indication of what the contribution was during the quarter? And then also, has it been out there long enough to gauge the reorder rate?

Well, number one, we don't disclose usually revenues from OrthoFlo or some of these product launches. We don't break it out that way, but I can give you a little bit of directional insight. I don't know that it's been around long enough to draw any major conclusions other than we continue to make good progress. We're seeing adoption in reorders, to your point. We're excited about the product. I think we've also said that there's other potential opportunities to expand that product line. And so Bruce, we're very excited about it, and we're seeing adoption.

Okay. And then --

[Patients] to that product line here in the months ahead. So --

Okay, and then speaking of additions to the product line, any update on the tendon repair products?

On the CollaFix side?

On the CollaFix side.

Yes. That project is moving forward. We've actually -- just a brief update. We've successfully converted from the bovine corium, or the cow skin, to the human placental collagen. We've now got our pilot production lines up and running, and we produced collagen fiber that are equivalent in strength with human fiber compared to the bovine. So now with our fiber modules up and running, now it's time for us to get down to the individual projects and how we're going to convert that fiber into specific configurations and then move forward for the filing of more than one 510(k) and then down the road, PMA. But the initial submissions will be 510(k), so we're working on our animal studies and other types of studies prepared from that first 510(k).

So we're on schedule. We made the progress that we've expected to make in converting the source of the collagen, and we still hope to submit for our first 510(k) later this year.

Okay. Then you mentioned that you've got 255 million covered lives right now. Are there -- were there any major additions to the insurance coverage during the quarter? And do you anticipate any additional insurance coverage going forward?

Well, we still have two of the biggest, United and Aetna, and we're working on those in every way we can professionally. And some of the others, Kaiser, is still in our sights and a few others, but that's basically it in terms of the coverage for EpiFix in the wound area. Of course, we're looking down the road at some coverage of some of these other new products. And again, I think we'll make progress there faster than anybody else can just because of the experience of what we've already accomplished here.

Okay, then last question, getting back to the diabetic foot ulcer procedures and the ability to on cross-sell with the Stability Biologics acquisition. Certainly, it would be an advantage to be able to combine with some metal on the extremity orthopedics side. Another product they use a lot is the injectable. Do you have the ability to -- do doctors have the ability to buy that if it's -- as long as it's not being promoted?

Yes. The physician offices can buy the injectable, that's right.

Okay, that's it for me, thank you.

Thanks, Bruce. Appreciate it.

And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Petit for closing remarks.

Thank you. Well, I think we've had a very informative and productive call. Lots of good questions, and hopefully, we've conveyed information and parameters you're seeking. We look forward to the next call, which will be in about 60 days when we finish up first quarter. And again, thanks so much for your interest. And those of you that are shareholders, thanks for your confidence in management. Thanks.

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