MiMedx Group Inc (MDXG) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MiMedx Group, Inc. Third Quarter 2016 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Thornton Kuntz, Senior Vice President of Administration. Please go ahead.

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 21E of the Securities and Exchange Act of 1934. These statements are based up on 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, 2015, and our most recent 10-Q. We do not undertake to update or revise any forward-looking statement, 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 CEO and Chairman, Pete Petit.

Thank you, Thorton, and good morning. We appreciate you joining us for our third quarter shareholder call.

I have with me today Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer; and Chris Cashman, our Chief Commercialization Officer. There are certain other executives in the room.

I would like to think that our third quarter should be viewed as a good solid performance. As previously noted, we exceeded our revenue guidance for a record of $64.4 million which was a 31% increase over third quarter of 2015. This revenue exceeded the upper end of our guidance and the analyst's consensus estimate of $63.1 million.

For the nine months ended September 30, our revenues increased 29% over 2015 to $175.1 million. From my standpoint, our most important financial metric is our adjusted gross profit margin which came in at 88%. As I've said on numerous occasions, this is a clear indicator of our performance operation -- of our performance operationally and any market pricing pressures. We continue to make improvements in our production processes which offsets any pricing pressures we have seen so far.

Our adjusted EBITDA for the quarter was $11.4 million and we have an adjusted net income of $6.2 million. This provided an adjusted diluted net income per share of $0.06. As we have said on previous occasions, our operating profit and net income are controlled by management's decisions regarding our future short- and intermediate term investments. We made decisions early this year to invest more rapidly in three new product line introductions to expedite their introduction, and that has taken place.

In the third quarter, we introduced our Lyophilized OrthoFlo product, as well as our AmnioFill product line. In the second quarter we introduced our Umbilical Cord Allografts. All these new product introductions have reduced our operating profit this year. But speeding up these expenses prepared us very effectively for the remainder of this year and for the quarters and years ahead. Of course, we made some other expenditure decisions on new clinical trials and related matters, which we believe will also enhance market acceptance of our products and reimbursement coverage in the short and intermediate term.

We're going to be able to provide more insight into the new products we have launched this year. To this point, we've kept discussions of these products to a minimum for competitive reasons. However, we will begin to provide to you more information and assist our analysts with the details necessary to put these opportunities into better perspective. Both Bill Taylor and Chris Cashman will provide some additional insights this morning.

Now I would like to make a comment about reimbursement. I believe it's well understood that our expertise in this area is exceptional because of our experience over the decades with the insurance industry. We very quickly obtained commercial coverage from all the payers except a few of the last large ones. We continue to work on bringing these coverage decisions to closure. Moving forward, you will see our continued expertise demonstrated in this area and we anticipate this will bring additional opportunities to the company.

Now a couple of additional comments on the FDA meeting that took place in September would certainly be appropriate. As we previously reported on a conference call, the meeting went exactly as we expected. There's now an orderly process, just following FDA regulations and proper protocols. We've been told that the agency received over 15,000 comment documents, I'll repeat that 15,000 comment documents, which would take "quite a while" to categorize, analyze and prepare responses to.

In the meantime, we continue to make good progress on our R&D BLA study on our micronized product, which is now the only such study taking place to our knowledge. So after over three years of this process, we believe that MiMedx is well-positioned to react to whatever decisions will eventually be made by this agency.

In summary, I think we've made some optimal decisions over the last year that have prepared us quite well for the quarters and years ahead. We've stated on numerous occasions, we believe our amniotic-based products will find their way into numerous medical procedures and therapies. With the introduction of the AmnioFill product line and the Umbilical Allografts, as well as our OrthoFlo, we're now using all the parts of the precious placentas which we collect, plus the liquid. With the [milieu] of proteins which are growth factors, cytokines, chemokines, we have products now that will benefit a much broader area of medical procedures. Incidentally, we are seeing good revenue momentum in October and, frankly, we believe that will continue.

I'm going to turn the discussion over to Bill Taylor. Bill?

We had a very thorough shareholder call back in early September where we spent a lot of time covering our clinical studies and our FDA outlook. Therefore, I will not cover those areas today.

As Pete mentioned, the third quarter was another good quarter by our team, with several very strong performances by various groups. Our commercial Wound Care team had a particularly strong performance, even considering the summer vacation schedules of physicians and patients. Our analytics team has done an excellent job of mining various databases and has identified numerous growth areas for our sales force and we see a significant opportunity for continued revenue growth over the coming years. We've outlined our territory management plans for the next five quarters and are very excited about the expansion opportunities that we see. Central to these plans are the addition of sales personnel.

As of today, our field sales force is up to about 300 professionals, and we have plans to hire about 25 more in the next three months as our sales momentum continues to build over the next three months. As our sales momentum continues to build, we'll also continue with our detailed plans for hiring nationally through the end of next year, over those five [quarters].

So our progress in the third quarter with respect to Stability Biologics, was hampered by some production issues. The revenue from SB products in the quarter was noticeably less than we expected due to these issues. We had to deploy several of our Marietta resources to San Antonio to address these issues, and we have been making progress. Had we not experienced these factors, we likely would have had additional revenue thanks to our Wound Care surgical and orthopedic team performances with MiMedx products. We're very pleased with these groups' ability to outperform their sales target levels.

On the OEM front, we're also very pleased to report that we have expanded our relationship with Zimmer Biomet. We've added a private label of our Lyophilized version of OrthoFlo to our contract and they are now selling that into the private office channel. This specific group has about 90 sales reps that are selling this product as one of their lead products.

While we can't go into the details of our sales to Zimmer at this point, we are very excited about their enthusiasm and the focus that they have on this product line. We hope to see some very big things come out of this expanded relationship. This relationship and our own focus on expanding the use of OrthoFlo in the physician office is expected to be another growth driver for MiMedx in the coming years.

On the new product front. I want to acknowledge our team's work on AmnioFill, our placental ECM product line that we announced during the third quarter and recently launched. Our product development, quality assurance and operations teams did a great job in bringing this product to market in an accelerated timeframe. I also want to point out what a great job our national contracts did in getting this product added to our biggest GPO contracts by the time we were ready to launch. This has provided us with the distinct advantage in speed-to-market and we expect strong growth in this surgical product line over the coming quarters.

Chris will talk about the market opportunity here, but the key takeaways that we anticipate AmnioFill to be another long-term growth driver for MiMedx, as well.

With that, I'll turn it over to Chris.

Thanks, Bill and good morning. We are pleased with our Q3 performance. Our sales force is now just about 300 individuals and will grow to approximately 325 in the next three months. Our Q3 performance was led by a strong effort in commercial Wound Care. We are benefiting from our new sales alignment, instituted in the first quarter, which allows for greater focus and attention on our core business.

The business planning and Sales Management System we implemented has enhanced the guidance, direction measurability and focus to really improve our results as we expected from this process. SSO had a slow start, which is normally the case during the summer months. However, outside of the SB issues, described by Bill, the rest of SSO came on very strong to close out the quarter, making up the initial ground loss towards sales objectives.

We added a number of additional distribution partners in the orthopedic and spine areas. As well as for our physician office initiative, which I'll speak to in a minute, as part of new products comments.

Internationally, we attended the World Union of Wound Healing Societies Conference out in Florence, Italy at the end of September. There was great interest in our product and our booth was literally swamped. We sponsored a lunch symposium entitled the Dynamic Impact of EpiFix Amniotic Membrane Allografts. The chair of the lunch symposium was Dr. Severin Lauchli, a recognized thought-leader in Switzerland, who spoke on the Swiss experience with EpiFix. Dr. Tom Serena presented the scientific and clinical evidence of EpiFix dHACM membrane. Dr. Matthew Garoufalis presented application techniques and therapeutic approaches using EpiFix and AmnioFix allografts for wound healing and surgical procedures.

I want to emphasize this was a very important meeting for MiMedx as we now count within our sales management infrastructure a Vice President of European sales who heads up our core efforts focused on our commercial operations in the European Union.

Italy, Switzerland, the U.K. and Ireland are among our initial focuses for EpiFix. We are working on a submission to Germany and expect to contract with additional partners in other EU countries shortly.

Our GPO and IDN contracts have become a very strong part of our growth. Our national contracts team has integrated very well into our local sales teams efforts that are helping drive system revenues, as well as open new and competitive accounts. Over 70% of our third quarter revenues fell under these contracts and September was the best revenue month ever in several of these systems.

Turning to new products. We announced two new introductions in Q3, OrthoFlo Lyophilized and AmnioFill, which joined our umbilical cord products, EpiCord and AmnioCord, launched in the second quarter.

OrthoFlo Sport will be our Lyophilized five-year shelf-stable, terminally sterilized, amniotic fluid product, which will predominantly be utilized in the physician and pain management office. And for now, will be sold through and managed by our SSO team. We believe it will be a significant part of our future growth and a large driver of tripling our revenue by 2020.

As a reminder, this pain injection market currently tallies over 8 million procedures annually. Made up of steroid, hyaluronic acid and platelets-rich plasma.

In 2016, the U.S. hyaluronic acid, viscosupplementation market will approach $900 million in spend and the number of steroid injections into the knee will exceed 4 million procedures.

As our clinical data grows, and is released, we believe that the consumer out-of-pocket pay market can be meaningful. Additionally, as Bill stated, we are excited that Zimmer, whom we are partnered with on a private label amniotic membrane tissue allograft, has chosen to also introduce an amniotic fluid-branded AmnioFlu -- excuse me [Amnioflo] and sell through their physician office sales force.

Our second product, AmnioFill, was introduced and launched at the end of the third quarter. It is a placental connective tissue matrix to replace or supplement damaged or inadequate integumental tissue and is comprised of placental extracellular matrix proteins. It also contains growth factors, cytokines and other specialty proteins present in placental tissue. We believe AmnioFill will address the large, complex and dehisced surgical wound segment. This product will be sold by both of our sales forces.

Examples of clinical applications include abdominal surgical complex wounds in orthopedic repair and reconstruction, in burns for coverage of large burn areas and also in deep wounds such as pressure ulcers. This is a cost-effective product that may be spread over large open dehisced surgical areas, as well as cover uneven or hard-to-reach areas. And we believe it is an opportunity to be used more proactively by surgeons and treating physicians to enhance healing, reduce scarring and modulate the inflammation of these complex conditions.

Both of these products are terminally sterilized, which is a very important point and education topic for us in the hospital operating room, physician office and the Wound Care center -- settings today. The majority of our competitors that offer advanced skin or dermal substitutes or cellular tissue-based products most often process the tissue in an aseptic manner.

MiMedx is always focused on patient safety and not only does our PURION process retain the native growth factors, cytokines and chemokines that are present in fresh amniotic membrane, but we take the additional step of terminal sterilization to assure that there is a minute possibility of any transmission of disease, while preserving factors in the bioactivity.

Specifically, MiMedx's process and terminal sterilization validations provide a less than 1 in 1 million probability of a non-sterile unit. Which is at least a 1,000 times higher safety margin and typically -- excuse me, than typical aseptically processed tissue products. Hospital staff and infection control have taken notice and with the advent of viruses like Zika, we believe this to be a very important requirement as healthcare evolves.

I'll now turn it over to Mike Senken.

Thanks, Chris, and good morning. The company reported revenue for the third quarter of approximately $64.4 million, an increase of 31.4%, or $15.4 million, over prior year third quarter revenue of $49 million.

Wound Care revenue was $49.8 million, which represents an increase of 39% over prior year and 18.5% sequentially, with growth driven by additions to our commercial Wound Care sales team.

SSO revenue was $14.6 million, which represents growth of 10% over prior year and a decline of 5% sequentially.

Growth in SSO revenue was lower than expected due to ongoing integration issues of the Stability Biologics' acquisition. With a continued expansion in our sales coverage, we added over 400 new customers in the quarter. For the nine months ended September 30, 2016, reported revenues were $175.1 million, which represents an increase of $39.7 million or 29.3% as compared to prior year. Year-to-date Wound Care revenue is $131.2 million as compared to $101.2 million in the prior year. And SSO revenue is $43.9 million as compared to $34.3 million in the prior year.

As discussed in prior earnings conference calls, due to the impact to results of the acquisition of Stability Biologics, that closed on January 13, 2016, and the release of evaluation allowance on the deferred tax assets and its effect on net income in 2015, the company has decided to include additional adjusted non-GAAP measures in our press release and earnings call to provide a means of comparing normal ongoing operating results on a year-over-year basis.

The additional measures include adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted EPS, to normalize results for comparison purposes in addition to reporting GAAP results. Tables are provided in our press release, which reconcile non-GAAP to GAAP reported results.

GAAP gross margins for the quarter were 87.6% as compared to 89.8% in the third quarter of 2015.

2016 third quarter gross margins were impacted by approximately $247,000 in onetime costs related to the Stability Biologics acquisition. On an adjusted basis, gross margins for the third quarter 2016 were 88%. The gross margin decline was due primarily to product mix, and cost due to the launch of several new products.

On a year-to-date basis, GAAP gross margin was 86.7%, which includes $1.6 million in onetime costs. Gross margins after adjusting for these onetime costs we're 87.6% as compared to gross margins of 88% in the prior year. The year-over-year decline of 1.2% is due to product mix and impact of new product launches.

Included in the press release today is a reconciliation of GAAP gross margin to adjusted gross margin.

R&D expense for the quarter was approximately $2.9 million or 4.5% of quarterly revenue as compared to $2.2 million in the third quarter of 2015.

On a year-to-date basis, R&D spending is up $2.5 million or 41% over prior year. This year-over-year increase in R&D spending is driven primarily by increased investments in animal studies and clinical trials.

Selling, general and administrative expense was approximately $48.2 million for the quarter or 74.8% of quarterly revenue as compared to $34.9 million or 71.2% of quarterly revenue in 2015.

During the quarter, we added 21 direct sales reps, bringing the total direct tales headcount to 290 at September 30, 2016.

The year-over-year increase in SG&A spending was due to the continued build-out of our direct sales force in both Wound Care and surgical markets, new product launches, international sales development, government affairs and other support areas, as well as the addition of Stability Biologics' personnel and associated costs.

Also included in Q3, in SG&A, was approximately $237,000 in onetime costs related to the acquisition. On a year-to-date basis, SG&A expense was 75.1% as compared to 71.5% in 2015.

The company reported a positive adjusted EBITDA of $11.4 million for the quarter ended September 30, 2016 as compared to $11.8 million in the third quarter 2015. It is the 19th consecutive quarter of reporting positive adjusted EBITDA. The lower adjusted EBITDA reflects management's decision to accelerate investment in several strategic areas, including the build-out of both the direct Wound Care and surgical sales teams, clinical trials for reimbursement and sales purposes, international business development as well as new product launch costs.

For the nine months ended September 30, 2016, adjusted EBITDA was $30.5 million or 17.4% of revenue, as compared to 23% in 2015 reflecting the aforementioned investments to further position the company for long-term growth.

GAAP operating income in the third quarter was approximately $4.7 million or 7.3% of quarterly revenue. Excluding $484,000 in nonrecurring charges related to the Stability Biologics acquisition, adjusted operating income was $5.2 million or 8.1% of revenue as compared to $6.7 million or 13.7% in 2015.

On a year-to-date basis, adjusted operating income was $12.4 million or 7.1% of total revenue as compared to an operating income of $16.6 million or 12.3% of revenue in 2015.

The company reported GAAP net income for the third quarter of approximately $3.3 million or $0.03 for basic and diluted common share as compared to net income of $6.6 million or $0.06 for basic and diluted common share in the third quarter 2015.

On a non-GAAP basis, third quarter adjusted net income was $6.2 million or $0.06 per diluted common share as compared to $6.6 million or $0.06 per diluted common share in the third quarter of 2015. Please refer to our table in the press release for a reconciliation of our GAAP net income to adjusted net income.

Year-to-date adjusted net income was $16.3 million or $0.15 per diluted common share as compared to a year-to-date net income of $17.3 million or $0.15 per common share in 2015.

Turning now to our balance sheet. The company reported approximately $106.2 million in total current assets, including $18.3 million in cash, $63.4 million in accounts receivable, $18.3 million in inventory and $6.2 million in prepaid expenses and other current assets.

Day sales outstanding were 89 days as compared to 86 days at the end of the prior quarter. We continue to add collections and field reimbursement staff to improve collection performance, as we work to keep pace with the rapid growth of our customer base.

Inventory turned 1.7 for the quarter which is flat with the prior quarter. Inventory levels are impacted by a significant number of new products added to our portfolio due to the Stability Biologics acquisition, as well as the previously announced new product launches such as OrthoFlo Lyophilized, EpiCord, AmnioCord and AmnioFill.

Goodwill and intangible assets were $27 million and $27.2 million, respectively, as compared to $4 million and $10.8 million at December 31, 2015. The increase was due to the Stability Biologics acquisition.

Current liabilities were $41.6 million as compared to $26.8 million at 12/31/2015, with the increase in line with the growth of the business.

Turning now to our statement of cash flow. The company reported positive cash flow from operating activities of approximately $2.8 million for the quarter, which is down over the prior quarter and prior year third quarter, due to increases in working capital in support of our growth, as well as the previously mentioned increase in spending. Cash flow from investing activities for the quarter were negative $1.7 million driven primarily by $1.5 million in capital expenditures comprised of IT infrastructure in support of our sales activity, as well as investments required for new products and GMP certification.

Net cash flow from financing activities was a negative $6.6 million including $6.8 million in share repurchases, somewhat offset by the exercise of stock options. Please also note that there is approximately $4 million still authorized under the share repurchase program through December of 2016. And finally, we added a total of 28 associates in the quarter bringing our total headcount to 681.

Turning now to our guidance. MiMedx estimates fourth quarter revenue to be in the range of $69.4 million to $72.9 million, and full year revenue to be in the range of $244.5 million to $248 million as compared to the previous guidance issued of $243.5 million to $248 million. The company is reiterating our previously announced full year 2016 fully diluted adjusted EPS estimate to be in the range of $0.21 to $0.23 per share. Please see the tables included in our press release for a reconciliation of GAAP EPS to adjusted EPS.

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

Thank you, Mike. Let's open the call for questions and answers.

(Operator Instructions) Our first question comes from the line of Matt Hewitt from Craig-Hallum.

A hand full of questions here. First, could you provide what the Stability Biologics contribution was in the quarter? Just so we can figure out the organic piece there.

The direct contribution, Matt, was $2.6 million and I caveat that because that doesn't include the sales of our products through their channel. But of their products it was $2.6 million and that compares to approximately $4.1 million in the previous quarter.

Okay. And then, if you could help us with the disruption that you saw in that -- in those products. Is there any way to quantify how much impact you saw in the quarter?

This is Bill. Had we not had the issues we faced, my personal belief is that we would've been above where we were last quarter.

Okay. That's really helpful. Shifting gears a little bit. International. Where is that now? Are you generating sales, or yet, or is this still kind of about laying the groundwork for next year?

Yes, Matt, it's Chris. We really are laying the groundwork, as I stated earlier. That World Union meeting was a significant meeting for us. It was, in many ways, a major introduction to the full EU market, as all of these doctors were global. But we've laid the groundwork now. We have the approvals in Italy, in the U.K. for allowance, we're in Switzerland. So we're starting to make some good inroads there and we're starting to dive deeper in the relationships locally. We have our distribution partners that are all trained and up and going. Not a lot of significant revenue to report yet, but the groundwork is laid and we're excited about it.

Okay. Great. And then, as far as the new products that you've recently launched, or intending to launch here shortly. What segment, forgive me if you mentioned this on the mid-quarter call, but what segment will these products will be falling into just from a modeling perspective?

So on the AmnioFill side, because that's predominantly occurs in the operating room. I think that you'll see, and Mike can jump in here, I think the plan is to probably report it in the SSO segment.

Correct.

Okay. And then on the OrthoFlo side, again the bulk of that, as we have begun to share with you. OrthoFlo historically might have been done more in the hospital because of the cryo preserve version of it and the handling characteristics. But now with the Lyophilized version, the physician office of pain management have become the square in the bull's-eye of where we're going to be focusing in the future. So that will continue to be in SSO as well.

Yes, if I could just jump in on that too. On the AmnioFill side, [while we report it in] SSO, it is going to be sold by both of our sales forces. We have a number of our Wound Care folks that are very active in the surgical suite inpatient surgeries for dehisced wounds and so forth. So it'll be sold by both groups but for reporting purposes, it will be in SSO just to make it a little bit simpler. And then we've got the cord products, which AmnioCord will be reported in SSO and EpiCord will be reported in Wound Care.

Perfect. Okay, all right. Thank you. I guess two final ones for me here. Number one, DSOs. I think, Mike you mentioned that you're adding resources to help bring that number down. Do you have a target in mind whether not necessarily here in Q4, but do you have a target in mind maybe as you exit 2017. You want to get to x number of days?

I think looking at our customer base and our mix, quite frankly, our targets are probably closer to 75 than the 89 that we're at.

Okay, and then one last one as I've been doing checks here over the past few weeks. Hurricane Matthew, it sounds like there was some disruption in the Southeast hospitals and facilities closing. Have you factored that into your guidance? Sounds like some facilities are closed for a couple of days. How does that impact your business here in the fourth quarter?

So we do factor it in, Matt. We've taken it in into account we do have some various situations, but I think for us Q4 is always -- is normally a strong quarter for us revenue wise and we'll be able to handle those issue as well as continue on the growth trajectory that we've stated for the fourth quarter.

And I mentioned in my comments that October started out quite well for us.

Our next question comes from the line of [Ethan Posasnik] from Needham.

A couple of quick questions for me. Could you maybe discuss any updates on the perspective trial of AmnioFix and Da Vinci prostatectomies?

This is Pete. Dr. Patel study and, of course, he did a retrospective publication a year or so ago that was well received. Now that prospective results should be pretty much finalized by the end of this year. Expect publications by mid-next year. But the trial's going exceptionally well. There's 230 patients in the trial, so it's a robust trial. And quite looking forward to having that information published.

Okay, great. And could you maybe talk about what procedures you guys are most focused on in the surgical business?

Sure, Ethan. Specifically to the abdominal pelvic area. I think you led into with that question about Dr. Patel and the prospective study. We are still very focused in urology. As a lead procedural candidates, we still do the prostatectomy procedure and that revenue continues to grow and there's good acceptance so good traction there. We also focus in on colorectal areas, especially when there are resections or there's [anastomotic] sites where you are joining up two opposing tissues and you need to have enhanced healing. We also see utilization, both in general surgery as well -- general surgery as well.

So that's the abdominal pelvic area. Again, we're creating and really driving a new market opportunity and it's totally focused on enhanced healing. There's never been a tissue that's been introduced that is so rich in specialty proteins and growth factors as is AmnioFix and our technology platforms. So our team is doing a good job there.

On the SSO side -- I'm sorry on the surgical, specific to spine and orthopedic side, we are focused with our membranes and reconstructive procedures like knee replacement, where we can enhance healing, and modulate the inflammation, as well as some of the other sports medicine areas, and spine again for acting as a barrier to scar tissue formation.

Our next question comes from the line of Bruce Jackson from Lake Street Capital Markets.

Best quarter and thanks for the comprehensive overview. I just got just a quick question about the OEM business. So, specifically with the new Zimmer agreement. Have you booked any revenue off of that? And can you just talk to us about the anticipated ordering patterns for that going forward?

This is Bill. We have booked revenue starting in the third quarter on that. We won't go into detail on how much. But it's already, let's just say, puts them in a different category than our other OEM relationships, probably the best way to put it and we do expect that we'll have essentially quarterly orders from them. As the business builds, I think that will translate into monthly orders, but on the initial builds, it will most likely be quarterly orders.

Okay. Are you exploring any additional OEM agreements?

Always.

Okay, great. Finally with the international expansion, so you're working -- doing the regulatory work in Germany. Pardon me. When might we see some actual revenue from that country?

Well, Germany's going to take a little longer than some of these other countries. I think we're probably still -- safe to say a year out before we might see some type of approval and allowance in the country. So could be later -- late, late 2017 going into '18.

(Operator Instructions) Our next question comes from line of Joe Munda from First Analysis.

[Real] quick, I guess piggybacking off of Bruce's question with Zimmer, the agreement there. I mean are they -- as far as -- and you may not have the answer to this, but are you selling -- are they selling OrthoFlo along with selling their Gel-One product or are they shifting -- or do you think that their shifting specifically to OrthoFlo and using that as their hyaluronic acid choice, if you will?

Well they have a dedicated group. And I don't want to speak too much about their inner working. I want to be respectful of their business. But they do have a dedicated group that is selling their Amnioflo product, and they've made it a product that is at the forefront of that effort in the physician offices. And that's what we're excited about.

And then switching gears toward AmnioFill. I guess doing a little deep dive, when the announcement came out with Acell being a primary competitor, I was just wondering if you could kind of give us a high level comparison, if you will, the benefits of AmnioCell versus Acell's product? I know theirs is [porosten]-based, I believe.

It is, it's a xenograft. And of course it's collagen-based. And there's a few growth factors in it, but it does not contain the benefits that you would see in an amnion -- human-derived amnion (inaudible)-based product. Where we have both a human collagen ECM as well as we reported, the growth factors, that we're now at 226 and counting proteins and chemokines and cytokines.

So from a, if you will, a safety factor that we talked about a lot, the terminal sterilization, the growth factor composition, is -- and of course our expertise. And then we look at the processing side of it, we're very excited about the differentiation of it. As well as the scalability of this process, again I think Pete has said it before, we weren't using all of the placenta, this also (inaudible) an opportunity to continue to take away (inaudible) of our internal processes and drive this from the placental disc. So it is a highly, highly differentiated product. And I think you'll see that in the marketplace.

I'm sorry Chris, I just realized the question on OrthoFlo. I don't mean to flip back and forth here. Pete opened up his comments regarding reimbursement and your experience there. I mean -- are you, can you give us an updated as for as what the pathway looks like right now for OrthoFlo. Getting reimbursement, I guess, or a CMS code, if you will, its own CMS code. Can you give us some idea what that possibly could look like as far as timing is concerned. And what you guys are doing right now to achieve that?

Yes, I'll just say a couple words then I'm going to hand it over to Bill, as well. As we said, with the lyophilized version, we're going to focus in the physician office. There's a significant opportunity there. As I stated earlier, there's over 8 million injections every year and it's growing at a significant rate. And over $1 billion will be spent this year between PRP and hyaluronic acids.

So we believe that there's still a meaningful out-of-pocket market for us over the next say year and a half, two years. As our initial data comes out and Bill will speak to this a little more, but we do have plans. I'm not sure that we've fully disclosed all those plans on trials, but we have significant ramped up those efforts.

Yes. Relative to reimbursement, we have a number of efforts underway based on clinical data that we're gathering for incremental reimbursement for various products, and OrthoFlo being one of them. I don't want to go a lot of details there, there are a lot of variables in terms of timing and the extent at which we'll be able to get reimbursement and for what settings we'd be able to get reimbursement. Whether it be for physician office or outpatient, etc.

So about all we can say now is we do have plans for achieving reimbursement for these various products. I really don't want to go into a lot of detail on timing or how we're going about it because obviously that's one of our competitive advantages here. So but do -- it's not going to be anything that is imminent because these things obviously do take time. But I think if you look out down range in the neighborhood of two-ish years from now, I think we'll have a different landscape than what we have today.

And Joe, if I can just add one other thing. I think there's two points to remember. One, not every patient -- a lot of patients aren't going to respond to the option and products that are in there today, whether it's an HA-based product or PRP. So that's one opportunity where obviously, we have an -- patients will turn to something new and the doctors. But number two, OrthoFlo, as well as our AmnioFix product portfolio are very differentiated from a technology standpoint. HA is literally hyaluronic acid. And so it will create some lubrication in the joint for a period of time, but it doesn't have the [milieu] of proteins and growth factors, cytokines that are in OrthoFlo and its amniotic fluid, and that is a huge differentiator. So again, that's why we're bullish on the out-of-pocket pay part of this.

Okay. That's helpful. Just one, a couple more follow-ups. Regarding Stability Biologics, I just want to make sure I have this right, $2.6 million versus $4.1 million last year. But this year they're selling their own proprietary products as opposed to distributing other peoples' products last year, right?

Joe, that was sequential numbers not last year.

That's quarterly. Yes, that's the case. Remember we tried to convey this in numerous ways. Up until this year they were basically not a manufacturer, they were a distributor. Although last fall, they began to process. So they're now a manufacturer and this is where we're having to give them substantial help.

Okay, and then any update on their rep count? Are they still running roughly a 100 reps since we last heard?

I think that's a fair number to work with. In my earlier comments, I said that we've added other additional distributors to our network. But we are also -- always reconciling and rationalizing those groups. So that's a good number.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pete Petit, Chairman and CEO.

Thank you. Well again, we appreciate you joining us for this update. We look forward to [continue] to report some results that align with what we've just reported. We're optimistic about the changes we've made early in this year in terms of our systems and everything else. And we have spent our time hopefully in the penalty box for slightly missing our numbers first quarter and hopefully, we'll continue to report what we've done in the last two quarters for you in terms of results. Thank you, and we'll be in touch.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.