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AxoGen (AXGN)

March 11, 2015

Price

Initiating Coverage with an OUTPERFORM and a $5 PT;

Reshaping the World of Peripheral Nerve Reconstruction
AxoGen is a rapidly growing emerging medical technology company with a
leading franchise in the large, underpenetrated nerve repair market. The
companys flagship product is Avance, the only commercially-available nerve
allograft. Avance has shown in clinical studies that it can produce recovery rates in
peripheral nerve injury repairs that are similar to autograft, the gold standard, but
without autografts associated downsides and limitations. With AxoGen growing
revenues over 40% yr/yr in each of the last four years (including over 50% in 2014),
generating gross margin in the 75%-80% range, increasing Avances body of
clinical evidence, expanding its commercial infrastructure, and growing its customer
base, we believe AxoGen is well-positioned to capture greater share of the $1.6
billion U.S. peripheral nerve repair market opportunity.
Highly differentiated product portfolio with a company and management team
solely focused on the nerve repair market. An estimated 700,000 peripheral
nerve injury repair procedures are performed annually in the U.S.; we believe
AxoGen, despite its small size, has made significant inroads into becoming
recognized by the surgeon community as a rapidly rising leader in the field. We
believe this is attributable to the investments the company has been making in
surgeon education/training, patient outreach, and clinical research, while its
competitors, which are mainly orthopedic companies, have reprioritized resources
away from nerve repair; we now estimate that AxoGen may be fast approaching
the number-one market share position (from a minor position 4 years ago).
With a commercialization infrastructure that finally has reached a critical
mass, we forecast AxoGen can grow revenue at a 5-year CAGR (14-19) of
45% and generate its first profitable year in 2018 on sales of approximately
$70 million.
Valuation and risks: Our $5 PT is based on applying a 3.5x multiple on our
2018 sales estimate (first profitable year), discounted back for 1 year at 35%,
and using our 2018 fully diluted share count. This multiple is in line with the
average (range of 1x-5x) that several high-growth, small-cap MedTech companies
currently trade on 2016. Risks to attainment of our PT include lower-than-expected
product adoption, regulatory delays, manufacturing difficulties, limited financial
flexibility, and potential competition.
FYE Dec

2014A

REV (M)

ACTUAL

CURR.

2015E

Q1 Mar
Q2 Jun
Q3 Sep
Q4 Dec
Year*
Change

$3.1A
4.2A
4.7A
4.8A
$16.8A
53.6%

$4.8E
$6.0E
$6.8E
$6.9E
$24.6E
46.0%

Medical Devices

2014A

PREV.

ACTUAL

CURR.

Q1 Mar
Q2 Jun
Q3 Sep
Q4 Dec
Year*
P/E
Change

($0.24)A
(0.21)A
(0.19)A
(0.20)A
($0.85)A

($0.19)E
($0.17)E
($0.14)E
($0.15)E
($0.65)E

PREV.

Rating

OUTPERFORM
12-Month Price Target

$5
Tao Levy
(212) 938-9948
tao.levy@wedbush.com

Company Information
Shares Outst (M)
Market Cap (M)
52-Wk Range
Book Value/sh
Cash/sh
Enterprise Value (M)
LT Debt/Cap %

24.6
$80
$2.11 - $4.24
NA
$0.68
$88.6
NA

Company Description
AxoGen is a leading player in the nerve
repair market. Its product portfolio for the
treatment of peripheral nerve injuries
consists of Avance Nerve Graft, AxoGuard
Nerve Connector, and AxoGuard Nerve
Protector .

2016E
CONS.

CURR.

4.8E
5.6E
6.5E
6.8E
$23.8E

----$35.4E
44.2%

CONS.

CURR.

(0.15)E
(0.13)E
(0.12)E
(0.10)E
($0.48)E

----($0.47)E

2015E

EPS

$3.20

PREV.

CONS.

----$32.1E
2016E
PREV.

CONS.

----($0.29)E

Source: Thomson Reuters

Consensus estimates are from Thomson First Call.

* Numbers may not add up due to rounding.

Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. Please see page 25 of this
report for analyst certification and important disclosure information.

TABLE OF CONTENTS
Investment Overview

Financial Review and Outlook

Valuation: OUTPERFORM and $5 Price Target

An Introduction to Peripheral Nerve Repair

AxoGens Product Portfolio

Avance Nerve Graft: An Emerging Alternative to Autograft

10

AxoGen Market Opportunity

14

Commercialization Strategy

17

Reimbursement

17

Competitive Landscape

18

Intellectual Property

19

Management

19

Risks to Achieving Our Price Target

20

Tao Levy (212) 938-9948

AxoGen | 2

Investment Overview
AxoGen is a rapidly growing player in the regenerative medicine market, with a focus on the repair of peripheral nerve
injuries, and has a product portfolio (Avance Nerve Graft, AxoGuard Nerve Protector, AxoGuard Nerve Connector) that
addresses a $1.6 billion U.S. market opportunity. The companys flagship product, Avance Nerve Graft, is highly differentiated in
the marketplace as it is the only off-the-shelf, commercially available processed nerve allograft (i.e., cadaveric human tissue obtained
from a donor) that is capable of bridging severed nerves (up to 70 mm) without the comorbidities associated with a nerve autograft
(current gold standard). In addition, AxoGen offers its AxoGuard line of products, which consists of: 1) AxoGuard Nerve Connector, a
coaptation aid to facilitate the tensionless repair of severed nerves, and 2) AxoGuard Nerve Protector, which is used to wrap and
protect injured peripheral nerves and reinforce the nerve reconstruction, while preventing soft tissue attachments.
With AxoGens peripheral nerve repair implants having been successfully used to treat thousands of peripheral nerve
injuries, and revenue having grown over 40% yr/yr for the past four consecutive years, we believe AxoGen has reached the
necessary critical mass to continue this growth trajectory. Over the near term, we expect AXGNs focus to continue on the U.S.
market, where it generated essentially all of the companys 2014 revenue of $16.8 million (+54% yr/yr). AXGN ended the year with a
sales force infrastructure that included 29 direct U.S. sales reps and 23 U.S. distributors. Looking forward, we believe AxoGen is wellpositioned to increase the penetration of Avance and AxoGuard into the peripheral nerve repair market, driven by a growing awareness
of its technology from the surgeon community, an expansion of its commercialization infrastructure, and an increase in peer-to-peer
education symposiums, which include the discussion of a growing database of patients treated with Avance that previously were not
viewed as candidates for any other implant but autograft.

Financial Review and Outlook

A quick history of AxoGen
The company was founded in 2002 and began selling Avance in 2007. In January 2008, the company had struck an exclusive
agreement with Stryker (SYK, not rated), a leader in the orthopedic trauma market, to distribute Avance. However, Stryker, at the time,
was navigating through Department of Justice settlements stemming from improper financial relationships between orthopedic
companies and orthopedic surgeons; as a result, Stryker was not focused on distributing AxoGens Avance, and AxoGen began the
process to terminate the distribution agreement in mid-2009 (officially parting ways in February 2010).
AxoGen went public in September 2011 through the reverse merger with LecTec Corporation. The simple rationale for the merger was
that LecTec had unused cash on its balance sheet from legal settlements related to medicated patch technology, and its board had
been searching for a new growth opportunity in healthcare. At the same time, privately-held AxoGen was evaluating raising additional
private equity to fund its growth initiatives. As a result, a merger was a viable solution to satisfy each companys strategic objectives.
AxoGen only began to establish its own sales force and infrastructure in 2010, and given its limited financial resources, the expansion
of the sales force did not gain momentum until after it closed the reverse merger with LecTec (September 30, 2011). As a result,
despite the fact that Avance has been available for the past 8 years, it was not until 2012 that AxoGen had a complete
commercialization infrastructure.
Financial review
AxoGens financial results are driven by its Avance and AxoGuard products which are used in the repair of peripheral nerve injuries. For
2014, the company reported full-year revenue of $16.8 million, which represented 54% yr/yr growth; thus far, we estimate that AxoGen
has penetrated only about 1% of its U.S. market opportunity, suggesting a significant runway to continue growing at robust growth rates
for the foreseeable future. Our assumption is that over the next few quarters, AxoGen will invest more heavily in its commercial
infrastructure in order to support and fuel greater adoption of its full suite of nerve grafts.
Financial outlook
Figure 1 summarizes our revenue profit (loss) outlook for AxoGen; we forecast the company can generate its first profitable year in
2018. In Figure 2, we point out that approximately 55% of revenue was generated from Avance in 2014, and over time, we expect the
proportion to remain at similar levels, reflecting managements focus on driving adoption of its entire product line. However, the exact
composition in the outer years will depend on the types of emerging nerve reconstruction procedures that may gain traction as some
Tao Levy (212) 938-9948

AxoGen | 3

may be more appropriate for Avance (e.g., oral maxillofacial). AxoGens products generate relatively high gross margin (i.e., 75%-80%
range), and we believe it is well-positioned to maintain these levels as its products are cost-effective compared to alternative treatment
modalities and face limited competitors; in addition, AxoGen has implemented annual price increases with limited pushback thus far.

Figure 1: AxoGen Historical and Project Annual Revenue and Net Income (Loss)

$120

$106.0
Revenue

$100

Net income (loss)

$73.6

$ in Millions

$80
$51.2

$60
$35.4

$40
$20

$7.7

$10.9

$16.8

$24.6
$1.3

$12.9

$0
($20)

($10.2)

($14.6)

($15.2)

($16.3)

($13.8)

($8.6)

($40)
2012A

2013A

2014A

2015E

2016E

2017E

2018E

2019E

Source: Company data, Wedbush Securities, Inc.

Fiscal 2015 Outlook: Leveraging its 2014 Momentum. During

AxoGens 4Q14 earnings call, the company provided its 2015 outlook,
forecasting revenue to exceed $24 million and gross margin to remain
in the mid to high 70% range. In addition, management expects to: 1)
expand its sales force to 35-39 sales reps in 2015 (from 29 at the end
of 2014); and 2) increase its investment in surgeon education
programs. As a frame of reference, in 2014, AxoGen hosted 4 peer-topeer surgeon training events; in 2015, the company expects to more
than double this number to 9 events. Results from the forums held in
2014 showed over a 60% increase in sales from surgeons who
attended these courses. Therefore, we expect sales and marketing
costs to increase a tad faster than revenue in 2015 (i.e., 82% of sales
vs 78% in 2014).

Figure 2: AxoGen Revenue Breakdown for 2014

2014A

AxoGuard, 45%
Avance, 55%

We forecast 2015 AxoGen revenue of $24.6 million (+46% yr/yr). Due

to historical seasonality trends in the companys business, we expect
sales to be sequentially flat in 1Q15, but to accelerate as the year Source: Company data, Wedbush Securities, Inc.
progresses. In addition, with just over half of the companys direct
sales force having been with AxoGen for over 12 months, we expect the newer hires to become increasingly productive during the year.
As a result, we forecast AxoGens operating loss to be approximately $12 million, an increase of approximately $2 million compared to
2014.
Fiscal 2016+ Outlook. For 2016, we forecast AxoGen can grow revenue by 44% yr/yr to approximately $35.4 million. We believe
AxoGen will continue to invest in its sales and marketing efforts, with plans to expand its direct sales representatives by another 6-10
individuals and host a similar number of surgeon education events as it did in 2015. With revenue expected to grow significantly faster
than operating expenses, we expect the company can reduce its operating loss to $9.6 million (versus $12.1 million in 2015). We do
expect the companys R&D expense to rise slightly due to incremental costs associated with its biologic license application (BLA)
Phase 3 clinical trial.
With expectations that these operational trends continue beyond 2016, we forecast that AxoGen should be in a position to generate its
first profitable year in 2018 on revenue of approximately $73.6 million.
Tao Levy (212) 938-9948

AxoGen | 4

Cash liquidity improves following recent financing transactions

As with other rapidly growing, emerging medical technology companies, AxoGen faces a balancing act between growing its top line and
adequately managing its cash resources, while avoiding dilution to existing shareholders. With this in mind, AxoGen has used a
combination of common stock offerings and debt financings as means to fund its growth. As of March 2015, the company had over $20
million in cash (and $25 million in long-term debt due in 2020), and based on our financial forecast, we believe AxoGen could require
one or two additional capital raises to achieve profitability in 2018 while also investing appropriately to expand its manufacturing and
commercialization infrastructure.
In November 2014, AxoGen entered into a $25 million term loan agreement with Three Peaks (a subsidiary of Oberland Capital), as
well as sold 1.4 million shares of common stock to Three Peaks for $3.55 million in cash. The proceeds from the Three Peaks Initial
Term Loan, Three Peaks Equity Sale, and $1.75 million of capital from AxoGen were used to fully repay a Royalty Contract the
company had with PDL BioPharma, Inc. (PDLI, Not Rated). Furthermore, the company entered into a 10-year Revenue Interest
Agreement with Three Peaks at a royalty rate of 3.75% of AxoGens revenues (with a revenue ceiling of $30 million in any 12-month
period). This new financing agreement was important as the company would have faced a rapidly increasing amount of minimum
payments due to PDL that would have hampered the companys ability to execute its growth strategy.
In addition, on February 10, 2015, AxoGen completed a public offering and raised approximately $13.6 million in net proceeds, which it
plans to use for continued sales force expansion, surgeon education initiatives, and the initiation of its Avance BLA trial.

Valuation: OUTPERFORM and $5 Price Target

Our positive stance on AXGN is based on our expectations that its peripheral nerve injury repair products should continue to capture
share and gain greater adoption as a treatment modality in repairing peripheral nerve injuries. We forecast AxoGens innovative
technology should enable the company to grow revenues at robust rates (i.e., 5-yr CAGR [14-19] of 45%) and achieve its first
profitable year in 2018.
Our valuation methodology employs forward revenue multiple analysis relative to a group of small-capitalization medical device
companies with above-average revenue growth. As shown in Figure 3, AxoGens comparables trade at an average enterprise value of
3.7x CY16E sales with a range of 1.0x-5.4x. Applying a 3.5x EV multiple to AXGNs 2018 sales estimate of approximately $70 million
st
(1 profitable year), discounting back for 1 year at 35%, and using its estimated 2018 fully diluted share count, we arrive at a 12-month
price target of $5 per share. This would offer investors approximately 50% potential upside from current levels and, as a result, we rate
AXGN shares OUTPERFORM.

Figure 3: AxoGen Comparable Company Valuation Analysis (figures in $ millions except per-share items)
Com pany Nam e

Ticker

CY2016

EV/Rev
CY14

CY15E

CY16E

Cytori Therapeutics

CYTX

$1.11

$110

$120

$7

$14

$44

NA

NA

2.7x

96%

226%

69%

Intersect ENT

XENT

$24.47

$575

$522

$39

$66

$97

NA

7.9x

5.4x

72%

46%

78%

MiMedx

MDXG

$9.81

$1,134

$1,082

$118

$186

$246

9.2x

5.8x

4.4x

58%

32%

91%

Osiris Therapeutics

OSIR

$18.40

$638

$588

$60

$92

$115

9.8x

6.4x

5.1x

53%

25%

78%

Regeneration
Technologies

RTIX

$5.32

$303

$294

$263

$283

$305

1.1x

1.0x

1.0x

8%

8%

53%

6.7x

5.3x

3.7x

72%

46%

78%

46%

44%

80%

EV

Revenue est.
CY2014 CY2015

Group Average
AxoGen

AXGN

$3.25

$80

$88

$17

$25

$35

premium (discount)

5.3x

3.6x

2.5x

-22%

-32%

-33%

Rev. Grow th (Yr/Yr)

CY15E
CY16E

Latest
reported
Qtr GM

Share
Market
Price (2) Cap

(1) CY2016 revenue estimate for ANIK is based on consensus EPS grow th
(2) Prices as of

3/6/2015

All estimates are Consensus, except for AXGN

Source: Thomson Reuters, Wedbush Securities, Inc.

In addition, we believe AXGN could represent a potential takeout candidate given its focus on the Extremities and Biologics markets,
which have been two areas of increased interest by strategics, attractive growth profile, unique technology, and sizeable market
opportunity. Prices paid for MedTech acquisitions have normally been in the range of 3x-8x forward sales, with the higher end generally
reflecting faster growing companies.
Tao Levy (212) 938-9948

AxoGen | 5

An Introduction to Peripheral Nerve Repair

The nervous system, which includes the brain, spinal cord, and nerves, is the control center for the body and carries out key functions
such as movement coordination, deciphering external stimuli, and monitoring organs. In general, the nervous system can be divided
into the central nervous system (CNS) and peripheral nervous system (PNS). The central nervous system, which includes the brain and
spinal cord, is focused on coordinating incoming and outgoing neural responses via nerves. A nerve is composed of hundreds of
neurons (both sensor neurons and motor neurons) that lie within long, thin tubes called basal lamina tubes. Each neuron has a cell
body with extensions called dendrites, which receive nerve impulses from other cells that are transferred to the cell body, and an axon,
which transmits impulses away from the cell body and toward the terminal region (ending). The basal lamina tubes (analogous to a
fiber-optic cable) are organized into bundles called fascicles, with each nerve potentially containing numerous fascicles (as shown in
Figure 6).

Figure 4: Diagram of nervous system

Figure 5: Structure of a neuron

Source: http://www.urmc.rochester.edu/, Company data, Wedbush

Securities, Inc.

Source: http://brainstormpsychology.blogspot.com/, Company data,

Wedbush Securities, Inc.

In peripheral nerves, sensory neurons, which are responsible for interpretation and signaling of external stimuli such as touch, pain,
etc., carry sensory impulses to the CNS; the CNS then processes this information and sends the appropriate motor response to the
nerves via the motor neurons. Motor neurons, in contrast to sensory neurons, carry signals from the CNS to muscle cells and glands;
the axons of motor neurons can be more than 3 feet long.
The PNS can be further divided into the autonomic nervous system, which controls involuntary muscles such as those found in the
heart, digestive system, and the glands, and the somatic nervous system, which is comprised of nerves that interact with the skin and
muscles and controls conscious activities, such as the movement of a finger or the sensation felt from external stimuli.

Tao Levy (212) 938-9948

AxoGen | 6

While the sheath-like feature of a fascicle provides

protection for the axons and support for regeneration
in the event of injury, PNS injuries mostly occur as a
result of trauma and approximately 3%-5% of all
trauma patients are believed to suffer from PNS
injuries. In general, a nerve injury occurs when a
sufficient number of axons have been crushed or
severed, which disrupts signals to the target motor
or sensory organ. Common reported causes of
traumatic injuries include motor vehicle accidents,
building construction mishaps, lacerations with sharp
objects, power tool injuries, and sports injuries. In
addition to trauma, surgical intervention (e.g., oral,
abdominal, and pelvic surgeries) and repetitive
compression (e.g., carpal tunnel syndrome) can
cause PNS injuries. When a peripheral nerve is
damaged through either traumatic or non-traumatic
causes, the result can be the loss of functionality
(e.g., ability to move muscles or to feel normal
sensations) at the targeted organ; for instance, if a
nerve is severed in the finger, it could lead to loss of
movement or numbness in the digit.

Figure 6: Cross-section of a peripheral nerve

Source: http://apbrwww5.apsu.edu/, Company data, Wedbush Securities, Inc.

It is estimated that each year approximately 1.4 million people in the US suffer from traumatic injuries to peripheral nerves. We would
note that multiple reports suggest this figure likely underestimates the incidence due to the many clinical disciplines that treat these
patients, such as orthopedic surgeons, plastic surgeons, and neurosurgeons. Based on various industry data and published clinical
reports, we estimate that traumatic and non-traumatic injuries to peripheral nerves result in over 700,000 extremity nerve repair
procedures in the U.S. annually.
In cases where a nerve is severed and there is loss of function and/or sensation, the surgeon generally would seek to repair the nerve
by providing a structural means through which the regenerating axons from the proximal end (closest to the cell body) can reconnect
with the distal end (furthest from the cell body). However, before beginning the procedure, the surgeon must assess whether the length
of the gap in the nerve tissue is small enough to directly suture the two ends of the nerve directly, which is referred to as a primary
repair (or direct repair). Ideally, a surgeon would opt for a primary repair. However, this is often complicated by the fact that a primary
repair only works effectively in the case of very small gaps (few millimeters in length) or when the nerve is only partially severed. In
addition, it is critical that the repair not generate tension on the nerve, as this can lead to a poor functional recovery due to a lack of
adequate blood flow reaching the injured area. We would also note that even on occasions when primary repair seems appropriate, the
nerve could stretch as it recovers, thus resulting in unforeseen tension and potentially a poor outcome.
In cases where the severed nerve gap is more than a few millimeters, the surgeon would need to bridge the gap between the nerve
ends to ensure a tension-free repair (gap repair). In these cases, the gold standard is nerve autotransplantation, which is the process of
removing healthy nerve tissue from another part of the patients body (usually the sural nerve from the back of the lower leg) and used
to repair the damaged nerve; this is often referred to as autologous nerve grafting (or autograft). The end result for the patient is the
loss of sensation in the region where the nerve was removed, in exchange for the possibility to restore nerve function to a more critical
area, such as the fingers. This is illustrated in Figure 7.

Tao Levy (212) 938-9948

AxoGen | 7

While the use of autograft leads to favorable results in the majority of cases (published literature indicates positive outcomes in 70%86% of patients, see Figure 15), there are several drawbacks to using autologous nerves that surgeons and patients need to consider:
1)

Autograft requires a patient undergo a separate surgical procedure to harvest the nerve, which raises the risk of infection and
other complications associated with any surgical procedure;

2)

The required second surgical procedure increases the overall procedure time by approximately 30-60 minutes;

3)

The added operating room time increases the overall medical cost of the procedure;

4)

The autologous nerve may not be of adequate size to enable a properly aligned and tension-free repair;

5)

Removal of the autologous nerve will result in the loss of sensation at that site (i.e., if the sural nerve is removed, this could
lead to numbness in the heel and lateral [outside] area of the foot);

1)

If the axons do not regenerate properly in a controlled and specific manner, this could lead to a painful and ineffective nerve
proliferation (neuromas) that may have to be surgically repaired.

As a result of the downsides and risks associated with autograft, several medical device manufacturers sought to develop hollow
conduits (tube-like structures) as an alternative option with which to surgically bridge the gap between the nerve ends. While conduits
are available off-the-shelf and can simplify the challenging suturing that is normally involved, surgeons have brought up a couple of
problems with conduits. First, clinical studies now suggest that conduits are most effective in bridging very short distances (i.e.,
<10mm). Second, some of the conduits have different handling characteristics than surgeons are accustomed to using. Nevertheless,
in the appropriate patient (i.e., short gap), conduits
(an off-the-shelf product that facilitates suturing of Figure 7: Using the sural nerve as a source for the autograft
nerves) play a useful role in peripheral nerve injury
Nerve reconstruction using autograft
Sural nerve harvesting
repairs and have led to a nerve repair market that
generates approximately $50-$60 million in annual
sales. This is a market in which AxoGens
AxoGuard
Nerve
Connector
competes.
Furthermore, it also suggests that surgeons are
seeking alternatives to autografting nerves given
the adoption of conduits, despite the limitation
around the size of the gaps they can address.
Prior to the availability of Avance, the only option
available for surgeons to successfully treat longer
gaps (i.e., > 10mm) was to use autograft. With
Avance, they now have an off-the-shelf product that
allows for tension-free nerve reconstruction in
discontinuities of up to 70mm in length. Importantly,
a growing body of published clinical data suggests
nerve reconstruction with Avance results in
outcomes comparable to patients treated with
autologous nerve. A detailed discussion of Avance
can be found in the following section.

Tao Levy (212) 938-9948

Source: www.mayoclinic.org/peripheral-nerveinjuries/enlargeimage1919.html;wiki.uiowa.edu/display/protocols/Sural+Nerve+Graft+Harvest,
Company data, Wedbush Securities, Inc.

AxoGen | 8

AxoGens Product Portfolio

AxoGens portfolio consists of 3 products: Avance Nerve Graft, AxoGuard Nerve Connector, and AxoGuard Nerve Protector. Avance
was developed by AxoGen; whereas the AxoGuard products were licensed in August 2008 from privately-held Cook (the Cook Biotech
division) and are exclusively distributed by AxoGen for use in the nervous system.

Figure 8: AxoGen product portfolio

Bridge gaps up
to 70mm

Wrap injured nerves

up to 40mm

Bridge gaps up
to 5mm

Source: AxoGen, Company data, Wedbush Securities, Inc.

Avance Nerve Graft is the first and only processed, off-the-shelf, commercially-available decellularized nerve allograft. Avance acts as
a bridge to guide and structurally support axonal regeneration across a nerve gap (defect) caused by traumatic or surgical intervention.
It is sourced from the peripheral nerves of human cadavers (allograft) which have undergone a proprietary method of processing tissue
that cleanses and sterilizes the nerve, while preserving its native three-dimensional structure (micro architecture). As a result, Avance
provides clean and clear pathways for the regenerating axons through which to grow. Importantly, Avance has the unique capability to
bridge gaps up to 70mm (diameters up to 5mm) and does not require the patient to sacrifice a nerve from another part of their body.
The donated human peripheral nerve tissue is obtained from FDA-registered tissue establishments under contract with AxoGen. The
recovered tissue is stored, processed, and packaged by AxoGen employees, operating within LifeNet Healths facility. LifeNet is one of
the leading tissue recovery and processing facilities in the U.S. and distributes more than 300,000 bio-implants every year for use in a
variety of medical fields including cardiac, vascular, and orthopedics. AxoGen and LifeNet have a tissue processing agreement that
renews annually unless either party chooses to terminate the renewal with 180-days advance notice. We do not view this as a risk since
there are other tissue recovery companies available and Avance has a 3-year shelf life, thus allowing AxoGen to build a significant
amount of inventory in a short period of time, if necessary. Under the agreement, AxoGen pays LifeNet a facility and tissue processing
fee for each production run (i.e., AxoGen effectively leases specialized clean rooms at LifeNet rather than incur the cost of constructing
these facilities themselves).
We believe AxoGens Avance Nerve Graft will be attractive to surgeons as it offers them four key benefits:
1)

Available off-the-shelf, thus eliminating the need to harvest autologous tissue, while also reducing the overall procedure time;

2)

Handles similarly to autologous tissue;

3)

Can be used to bridge long gaps (up to 70mm); and

4)

Supported by positive clinical data

Tao Levy (212) 938-9948

AxoGen | 9

AxoGuard Nerve Connector is designed to bridge small nerve gaps (i.e., typically less than 5mm in length) or defects where the
surgeon wants added protection at the suture sites when a graft is used. The connector resembles a hollow tube and provides a
channel through which axons can regenerate in an orderly fashion. Unlike other similar nerve conduits, the AxoGuard Nerve Connector
is translucent, which is an important benefit during nerve repair surgery as it allows the surgeon to better visualize the nerve ends that
are being sutured together.
AxoGuard Nerve Protector is also known as a wrap and is primarily used to protect nerves during the bodys healing process at the
site of coaptation (i.e., where two nerve endings are sewn together), especially with nerves that are partially severed or damaged from
compression. Similar to the AxoGuard Nerve Connector, the Protector is also translucent, which is an important advantage.

Avance Nerve Graft: An Emerging Alternative to Autograft

Avance is harvested from human peripheral nerve tissue and processed via AxoGens proprietary method. As a result, the nerve graft is
decellularized, cleansed, and sterilized to prevent infection and a negative immune response. Importantly, the extracellular matrix
(ECM), which serves as a critical scaffold for nerve regeneration, is preserved. The ECM is a three-dimensional network that includes
proteins and carbohydrates which provide structural support and regulate intercellular communication. One of the important proteins of
the ECM are laminins, which participate in cell differentiation, migration, and adhesion activities, and serves as a stimulus for successful
1
axonal regeneration . Because AxoGens process preserves the essential structure of the ECM while cleansing away cellular and
noncellular debris, the Avance Nerve Graft is capable of enabling and facilitating the bodys own cells to regenerate and recellularize
the graft by providing the bridge for the nerve to heal and reconstruct itself. Figure 9 shows a cross-sectional view of Avance and a
microscopic picture of Avances structure.

Figure 9: Avance micro architecture (left); Nerve regeneration across a processed nerve allograft (right)

Avance micro architecture

Nerve regeneration across a processed nerve allograft

Source: AxoGen; Repair of Nerve Defects in the Hand; Rinker & Vyas; Jin Bo Tang; Wedbush Securities, Inc.

Krekoski et al., Axonal Regeneration into Acellular Nerve Grafts Is Enhanced by Degradation of Chondroitin Sulfate Proteoglycan, The Journal of
Neuroscience, August 15, 2001, 21(16):62066213

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AxoGen | 10

One of the important aspects of AxoGens processing technique is its use of the enzyme chondroitinase ABC to digest chondroitin
sulfate proteoglycan (CSPG). CSPGs are found in peripheral nerves and inhibit the growth-promoting activity of laminin (i.e., limits
nerve regeneration); the presence of CSPGs actually increases following nerve injury. Therefore, the removal of CSPGs allows axons
to more readily regenerate through the graft.
Figure 10 summarizes the processes
involved in producing the Avance Nerve
Graft.
Avance comes in 16 different sizes with
varying widths and lengths; this allows the
surgeon to more precisely match the graft
size with the nerve injury site; which has
been shown to be important for the
success of the repair. However, with
autograft, the surgeon is restricted by the
size of the nerve that was harvested from
the patient, which may not be a good
diameter match. In addition, the amount of
nerve tissue obtained during autograft is
limited, which could constrain the extent of
peripheral nerve repair the surgeon can
perform.

Figure 10: Avance Nerve Graft tissue processing

Source: AxoGen, Company data, Wedbush Securities, Inc.

Positive Clinical Data Has Driven Greater Utilization of Avance

The key clinical data supporting the efficacy of Avance is the RANGER study, an ongoing, multicenter registry study, which was
initiated in 2007 and had its results first published in the journal Microsurgery in 2012. These results, which included data from 12
centers, 25 surgeons, and 132 individual nerve injuries, showed meaningful motor and sensory recovery in over 85% of patients treated
with Avance with nerve discontinuities between 5mm and 50mm. Although the RANGER study is a registry, which is less robust than a
prospective, randomized clinical trial, the outcomes do compare favorably to other published peripheral nerve repair studies, which also
were mostly based on observational studies. As a frame of reference, autograft outcomes have shown functional recovery to be in the
60%-80% range. For nerve conduit studies, the results in small gaps of less than 5mm are positive with 100% meaningful recovery;
however, beyond 5mm, the results drop down to 34% for gaps between 5mm and 25mm. In other studies, the nerve conduits from
Integra LifeSciences (IART, not rated) reported only a 43% efficacy rate.
To date, we estimate that thousands of peripheral nerve injuries have been treated with Avance with the increase in utilization reflecting
an expansion in the products scientific understanding, positive clinical data, and favorable surgeon experience.

Figure 11: Real-world utilization of Avance by nerve function, body area, and nerve type (through September 2012)

Source: AxoGen, Company data, Wedbush Securities, Inc.

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AxoGen | 11

Latest Ranger Study. As of January 2015, the

database included over 600 individual nerve repairs
from 18 center and 40 surgeons.

Figure 12: Summary of processed nerve allograft matched to tube

conduit and autograft by gap length

Quantitative results are available from over 100

patients with over 150 nerve repairs using Avance to
treat defects with a mean gap of 21mm (range of 565mm). Data from an abstract presented at the 2015
American Association of Hand Surgery (AAHS) Annual
Meeting in January 2015 indicated that recovery of
meaningful sensory function in patients with
gaps<30mm was 83% for the Avance repairs vs 49%
for conduits (p<0.001); in patients with gaps of greater
than 20mm, Avance showed a meaningful recovery of
79% vs 64% for autograft (not statistically significant
2
difference, see Figure 12).
th

At the 5 Vienna Symposium on Surgery of Peripheral

Nerves (March 2014), data was presented on the
Ranger study analyzing the outcomes by gap length.
The results show that meaningful recovery was
reported in 90% of gaps between 5-14mm, 80% in
gaps between 15-29mm, and 87% in gaps between
30-65mm. Importantly, there were no graft-related
adverse events reported. (see Figure 13).

Source: http://meeting.handsurgery.org/abstracts/2015/115.cgi; Company data,

Wedbush Securities, Inc.

Figure 13: RANGER study expanded data milestone (March 2014)

100%

90%
80%

87%

75%
50%
25%
0%
5 - 14 mm

15 - 29 mm

30 - 65 mm

Injuries Achieving Meaningful Recovery by Gap Length

th

Source: 5 Vienna Symposium on Surgery of Peripheral Nerves, AxoGen,

Company data, Wedbush Securities, Inc.

We would highlight that in 2013 the Ranger study was expanded by adding contemporary control groups, which enabled a more direct comparison of
Avances performance compared to nerve autograft and conduit repairs; the control arm was called MATCH. The MATCH study accumulated
observational data for autografts and conduits from the same sites used in the Ranger study in much a similar way as the data is collected for Avance.
Tao Levy (212) 938-9948

AxoGen | 12

2 Point Discrimination

CHANGE Study. AxoGen also conducted a multicenter, prospective, randomized, pilot study that compared Avance Nerve Graft to
hollow tube conduits to evaluate the difference in functional recovery outcomes for digital repairs in the hand, with the primary outcome
measured using static 2 Point Discrimination (s2PD; a
standardized measure where a lower value indicates Figure 14: CHANGE Study - Avance Nerve Graft reported greater
improved sensation). The study enrolled 23 subjects with 31 sensory recovery than hollow tube conduit at month 12
digital nerve injuries (5-20 mm in length) and had follow-up on
18 patients. Results of the CHANGE study, presented at the
16
January 2014 AAHS meeting, showed that the Avance Nerve
14
Graft group had a statistically significant improvement in
12
nerve recovery than the conduit group, at 12 months. We
10
believe these data are in the process of being submitted for
8
publication in a scientific journal.
6
RECON Study. Recon is a prospective, multicenter,
4
randomized, subject and evaluator blinded comparative study
2
of nerve cuffs (conduits) and Avance evaluating recovery
0
outcomes for the repair of nerve discontinuities and
Baseline Month 3 Month 6 Month 9 Month 12
represents AxoGens biologic license application (BLA) phase
3 clinical trial, which is expected to enroll 150 patients; we
Avance Nerve Graft
Conduit
expect the trial to commence later in 2015 (see next section
for further details).
Source: AxoGen, Company data, Wedbush Securities, Inc.

Figure 15: Comparison of original RANGER study results to historical reference literature
Number of
Nerves

Meaningful
Recovery/Positive
Outcomes

Year
Published

55*

87%

2012

Sens ory

55

89%

Ava nce

Mi xed

13

77%

Ava nce

Motor

86%

Ava nce

Study/Author

Nerve Type

RANGER

Sens ory, mi xed, a nd motor

Implant/Surgical Approach
Ava nce

Wa ngens teen a nd Ka l l i a i nen Sens ory, mi xed, a nd motor

64

43%

2009

Ki m a nd Kl i ne

Sens ory, mi xed, a nd motor

52

67%-86%

2001-2006

Di rect Suture a nd Autogra ft

Neura Gen Type 1 Bovi ne Col l a gue Tube

Frykma n a nd Gra myk

Mi xed nerves

91

75%-78%

1991

Di rect Suture a nd Autogra ft

Frykma n a nd Gra myk

Sens ory nerves

384

80%

1991

Autogra ft for Di gi ta l Nerve Injury under 5 cm

Weber et a l .

Sens ory nerves

62

74%

2000

Neurotube PGA tube

Weber et a l .

Sens ory nerves

74

86%

2000

Di rect Suture a nd Autogra ft

Ka l l i o et a l .

Sens ory nerves

254

70%

1993

Autogra ft a nd Di rect Repa i r

Ha ug, et a l .

Sens ory nerves

45

40%

2013

Neura Gen Type 1 Bovi ne Col l a gue Tube

*Only patients reporting quantitative data measures were analyzed for meaningful levels of recovery, hence the smaller number of nerves vs. overall RANGER

Source: Brooks et al; Miscrosurg.2012;32:1-85; AxoGen; Wedbush Securities, Inc.

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AxoGen | 13

Regulatory History and Status of Avance

Avance was launched in the U.S. in 2007 without the need for clinical trial testing as the company believed that the product should be
regulated as a human tissue for transplantation under what is referred to as section 361 of the Public Health Service Act and 21 CFR
Part 1271 Human Cell & Tissue Products (HCT/P) controls (more commonly referred to as simply 361 HCT/P). Tissue products under
control of 361 HCT/P are regulated by the Center for Biologics Evaluation and Research (CBER), but do not require premarket
clearance or approval as long as the tissue is minimally manipulated, is used in a similar fashion as its original function, manufacture
does not involve combination with another product, and does not involve metabolic activity of living cells. Following discussions
between AxoGen and FDA, the agency determined in April 2010 that Avance does not qualify to be regulated as a 361 HCT/P and
instead should be regulated primarily as a biologic product. As a result, Avance would now require a BLA (Biologics License
Application) approval supported by a phase 3 clinical trial. Importantly, in November 2010 FDA issued AxoGen a letter indicating the
agencys intent to exercise enforcement discretion (i.e., discretion not to enforce that Avance have an approved BLA for
commercialization) while the company pursues a phase 3 trial and submits a BLA.
In August 2011, AxoGen and the FDA agreed to the parameters of the phase 3 trial through a Special Protocol Assessment (SPA), and
AxoGen submitted its Investigational New Drug Application (IND) to the FDA in April 2013. The company is currently responding to FDA
comments regarding the IND, specifically around the potency, mechanical characterization, and labeling of Avance. Enrollment in the
phase 3 trial (called RECON) is expected to begin in the later part of 2015 and will be a prospective randomized blinded study of nerve
injuries in the hand that will compare Avance to nerve conduits. The FDA-approved design will include 150 patients with nerve gaps
between 5-25mm enrolled at 15 centers. The study is designed as a non-inferiority trial, which we believe provides Avance with a
higher likelihood of a positive outcome; furthermore, the trial is powered to show superiority, which we believe Avance could
demonstrate given the data reported in the RANGER and CHANGE studies. We estimate the study will take approximately 3.5 years to
complete once enrollment begins (2 years to enroll plus 1 year follow up) and will cost approximately $2 million. Based on the frequent
and ongoing communications between AxoGen and FDA, the agency appears comfortable with the companys progress and timeline;
as a result, while AxoGen pursues the BLA, we expect the FDAs enforcement discretion to continue.
While investors may be concerned regarding the regulatory status of Avance, we would highlight three important points:
1)

We want to reiterate that the FDA will continue to allow AxoGen to distribute Avance while it pursues the BLA.

2)

Avance was one of the first allograft tissues that the CBER division has ever reviewed. Because of this and the fact that
Avance was being sold prior to FDAs regulatory change, FDA has taken a pragmatic approach in handling Avances filing as it
learns more about how to best evaluate this category of products. In December 2014, FDA issued a Draft Guidance document
surrounding regulatory recommendations of Minimal Manipulation of Human Cells, Tissues, and Cellular and Tissue-Based
Products. This document appears to confirm the agencys viewpoint that changes to peripheral nerve tissue, such as that
required for the manufacture of Avance, would require a BLA. The important change that AxoGen makes to the allograft tissue
is the removal of chondroitin sulfate proteoglycans, which is necessary to eliminate as it is a natural inhibitor of nerve growth.

3)

Any other company seeking to introduce a nerve allograft with characteristics similar to Avance into the U.S. market would
likely need to follow the BLA pathway, including a phase 1 and a phase 3 trial for FDA approval. We believe this will serve as
an important barrier to entry for potential competitors.

AxoGen Market Opportunity

Overall, we estimate AxoGens targeted US market opportunity at approximately $1.6 billion. This is based on an estimated 900,000
annual peripheral nerve injury repairs (trauma and non-trauma); of these repairs, we estimate that 700,000 are located in the
extremities, 100,000 in carpal tunnel surgery revisions, and 68,000 in oral maxillofacial procedures. Importantly, as clinicians explore
the use of AxoGens products across additional surgical indications, we believe this could further increase the companys addressable
market opportunity over time; for example, nerve injuries that may occur during the removal of cancerous tissue, such as during a
prostatectomy.

Extremity
The largest market opportunity for AxoGen is in the repair of peripheral injuries located in the extremities (i.e., primarily upper
extremities, including digits), where we estimate 700,000 nerve repair procedures are performed in the U.S. annually. Of these repairs,
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AxoGen | 14

we estimate that 58% involve a gap that needs some sort of bridging material for the nerve to regenerate. Because Avance is best
suited for longer gaps, we estimate that 44% of the gap repairs would be appropriate for Avance, resulting in an annual addressable
opportunity of almost 180,000 procedures. Based on real-world experience, approximately 1.4 pieces of Avance are used per
procedure, corresponding to a unit market opportunity of approximately 250,000. The average selling price of Avance is approximately
$2,700, which would translate into a $675 million market opportunity.
The remaining 56% of peripheral nerve injuries (i.e., those involving a short gap), represent approximately 227,000 annual procedures
that could be treated with the AxoGuard Nerve Connector. At an average selling price of $700, we estimate this market at
approximately $160 million.
The final extremity peripheral nerve injury repair opportunity lies with those injuries that have not been severed and occur through
compression on a nerve or blunt force trauma. As a result, the repair does not require Avance or AxoGuard Connector, and instead the
surgeon seeks to insulate and isolate the nerve from the surrounding tissue as it heals. We estimate that this market represents an
addressable 294,000 repairs; at an average sales price of $1,600, we estimate the AxoGuard Nerve Protector market for the extremity
portion of the market at $470 million.
Figure 16 summarizes the U.S. extremity market opportunity worksheet.

Figure 16: US Extremity Market Opportunity

A

Annual Extremity-related peripheral nerve injury (PNI) repairs in US

% involving a "gap"

700,000

No. of PNI repairs involving a gap ("Gap Repair")

% treatable with Avance graft

No. of PNI repairs addressable with Avance

Avg. # of Grafts/procedure

Avance Nerve Graft Market Opportunity (units)

250,096

ASP ($)

$2,700

Avance Extremity market opportunity ($ millions)

Connector procedure opportunity (extremity)

No. of PNI repairs addressable with AxoGuard Connector ("Primary Repair")

ASP ($)

M AxoGuard Nerve Connector Extremity market opportunity ($ millions)

Calculation

58%
406,000

A*B

44%
178,640

C*D

1.4

$675
56% (1)
227,360

E*F
G*H
1-D
C*J

$700

$159

K*L

% PNI repairs with no "gap"

42%

1-B

No. of PNI repairs addressable with AxoGuard Wrap

294,000

A*N

ASP ($)

AxoGuard Nerve Protector Extremity market opportunity ($ millions)

$1,600
$470

O*P

$1,305

I+M+Q

Total US Extremity Market Opportunity ($ millions)

(1) excl udes l ong ga ps

Source: Company data, Wedbush Securities, Inc.

Carpal Tunnel Revision Surgeries

Beyond the extremity market, surgeons also use AxoGuard Nerve Protector in revision surgeries of patients who have recurrence of
symptoms following carpal tunnel relief surgery. We estimate there are approximately 100,000 annual revision surgeries performed. As
a way of background, in order to treat carpal tunnel syndrome, a surgeon seeks to relieve the pressure on the median nerve in the wrist
by cutting the carpal ligament, which releases the compression on the nerve. However, according to industry data, in approximately
20% of cases (i.e., 100,000 procedures out of 500,000 performed annually), the pain returns and one of the culprits appears to be scar
tissue (adhesions) that form around the nerve after surgery. In these cases, a second repair procedure needs to be performed. After
removing the scar tissue, the surgeon will wrap the nerve with AxoGens Nerve Protector to minimize soft tissue attachments (scarring)

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AxoGen | 15

that had led to the initial poor outcome. Assuming a price of approximately $1,600 for the wrap, we arrive at a market opportunity of
$160 million as summarized in Figure 17.

Figure 17: US Carpal Tunnel Revision Surgery Opportunity

R
S
T
U

No. of US Carpal Tunnel Syndrome surgical repair procedures

500,000

% of surgeries that require a revision

No. of Carpal Tunnel Syndrome repeat surgeries

100,000

ASP ($) - AxoGuard Protector

$1,600

Carpal Tunnel Syndrome market opportunity ($ millions)

Calculation

20%
R*S

$160

T*U

Source: Company data, Wedbush Securities, Inc.

Oral Maxillofacial
The last near-term strategic market opportunity we would highlight is oral maxillofacial, which includes peripheral nerve injuries due to
surgical intervention in dental and oral surgery procedures (i.e., third molar extractions, placement of dental implants, removal of
tumors). Occasionally, one or more sections of the trigeminal nerve, most often the lingual nerves (LNs) and inferior alveolar nerves
(IANs), may accidentally be injured, resulting in numbness in certain areas of the face and mouth. According to industry estimates,
approximately 68,000 oral maxillofacial peripheral nerve injuries occur annually in the U.S. Based on this figure, we believe this
translates into a market opportunity for AxoGen of $129 million as summarized in Figure 18. It is important to note that a combination of
Avance and the AxoGuard Connector can be used during the repair.

Figure 18: US Oral Maxillofacial Market Opportunity

V
W
X
Y

No. of US Oral and Maxillofacial injuries

% of surgeries treatable with Avance and Nerve Protector
No. of applicable injuries
ASP ($) of Avance and AxoGuard Protector

Oral Maxillofacial market opportunity ($ millions)

68,000

Calculation

100%
68,000

V*W

$1,900

$129

X*Y

Source: Company data, Wedbush Securities, Inc.

Other peripheral nerve injury market opportunities

Surgeons have used AxoGens products in several other types of procedures, and these would represent upside to our market
opportunity model. In a prostatectomy (prostate removal) the surgeon may use the Avance nerve graft to replace cavernous nerves that
had to be resected during the procedure. The goal would be to improve erectile recovery rates. AxoGen is sponsoring a feasibility trial
evaluating this approach during a da Vinci prostatectomy (robotic) procedure, and we expect results to be released in 2Q15. There are
also other surgical procedures where nerves have to be transected to reach a certain part of the anatomy (or are accidentally severed
during a surgical procedure) and would benefit from surgical nerve repair. These would include, for example, brachial plexus injuries
and iatrogenic nerve injuries, and would represent upside to the extremity market opportunity. The brachial plexus is a network of
nerves that go from the spine to the shoulder, arm, and hand; and injuries can occur through contact sports, trauma, and difficult child
births (e.g., a breech baby may suffer nerve damage while being pulled through the birth canal and can result in loss of function in an
arm); Iatrogenic nerve injuries generally occur inadvertently, with most of these nerve injuries occurring directly during surgery.

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AxoGen | 16

Commercialization Strategy
AxoGens product revenue grew 60% yr/yr in 4Q14 and 52% yr/yr for the full year 2014. This performance was the result of the
implementation of key growth initiatives over the past couple years, which we believe should continue to fuel the companys momentum
going forward.
1)

Improve awareness of AxoGens comprehensive nerve repair product portfolio. The company has sponsored
symposiums at key medical conferences, which have served to increase the awareness and scientific and technical
understanding of AxoGens products and the benefits these implants can provide in repairing peripheral nerve injuries. For
example, in January 2015, AxoGen sponsored a surgeon panel titled, The Value of Nerve Repair Technologies in Your
Practice at the Joint Annual Meetings of the American Association for Hand Surgery, American Society for Peripheral Nerve
and American Society for Reconstructive Microsurgery. The event was hosted by key opinion leaders in the field and had more
than 100 surgeons in attendance. Interestingly, the tone of these meetings has positively shifted over the last year, with more
surgeons asking questions on the practical aspects of AxoGens technology versus the basic science of the products.

2)

Supplement surgeon education and focus on the development of surgeon advocates. AXGN has been increasing the
number of surgeon training courses (peer-to-peer education events) it hosts during the year (i.e., 2 in 2013; 4 in 2014; and 9
expected in 2015). At these two day invitation-only events, approximately 20-25 surgeons review and discuss the latest
science and best practices in nerve repair techniques with a focus on AxoGens product portfolio. These events have resulted
in very positive surgeon feedback and led to a 60+% increase in revenue from surgeons who attended these events. For 2015,
the first surgeon education event was held in February, and it was rapidly oversubscribed. To date, management indicated
more than 110 surgeons had completed these events and expects over 225 surgeons to attend in 2015, representing an
important contributor to its 40+% yr/yr revenue growth target.

3)

Increase data supporting the performance of Avance. AXGN sponsored the largest multicenter clinical study in peripheral
nerve repair (RANGER study), a utilization registry of Avance, which currently includes over 600 nerve repairs across a
diverse population of nerves (digital, median, ulnar, facial, etc.). To date, the results have been published in two peer-reviewed
journals and presented at more than 35 scientific conferences. In addition, other studies and case series are being developed,
including repair of cavernous nerves (post prostatectomy), braxial plexus, military trauma, neurotization of breast
reconstruction, and compressive neuropathy.

4)

Penetrate deeper into existing customer accounts. Management indicated that surgeons, who use all three of AXGNs
nerve repair products, generate five times more revenue than an account that orders just one type of product. In 4Q14, the
number of accounts ordering two or more of AxoGen products increased 80% yr/yr. For the full year, revenue from these
accounts increased 72% yr/yr.

5)

Expand and develop sales force. AXGNs sales force is comprised of 29 direct reps (up from 23 at the end of 3Q14) and 23
distributors; of the direct reps, 16 have been with AxoGen for more than 12 months, which is roughly how long it takes for a
rep to become productive. The company expects to add an additional 6-10 direct reps throughout the course of 2015.
However, it is important to note that AxoGens sales force went through some significant changes a year ago as management
began to better understand the necessary skillset and work experience to successfully drive adoption of its products. The
adjustments followed the realization that AxoGens products require an individual experienced and comfortable selling a
product based on clinical/scientific data rather than someone used to achieving sales through spending time in the operating
room assisting the surgeon during the procedure (e.g., orthopedic reconstructive implant reps).

Reimbursement
It can take a surgeon anywhere from 30 to 60 minutes to harvest an autologous nerve from the patient, and the surgeon performs this
procedure immediately before reconstructing the nerve. The nerve reconstruction procedure can take anywhere between 1-3 hours
depending on the complexity of the repair. Payers generally reimburse hospitals for peripheral nerve repair procedures through a
prospective payment system whereby the amount includes all the costs involved, such as operating room time, materials used, hospital
care, etc.; the physician is reimbursed under a separate fee schedule. The hospital reimbursement rate varies widely depending on the
extent of the surgery being performed and can range from $6,000 to over $20,000. Since the hospitals costs come out of this payment,
it is in the institutions best interest to minimize operating room time, which accounts for a significant portion of the procedures cost, in
order to maximize its profits. Hospitals can charge between $1,500 to $3,000+ per hour for the operating room depending on the type of
OR required and the specific hospital (e.g., Cleveland Clinic charges approximately $3,500-$6,600 per hour). With the average sales
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AxoGen | 17

price of Avance at approximately $2,700 (price has been rising due to price increases and the use of longer grafts) and approximately
30-60 minutes of reduced OR time, we believe the use of Avance is at least cost-neutral compared to autograft for the healthcare
system when OR costs, physician time, risk of adverse events, and patient outcomes are accounted for. In addition, clinical studies
have shown that the use of conduits can significantly reduce operation times in patients with short nerve gaps (<6mm) when compared
3
to directly suturing the nerve ends.

Competitive Landscape
The peripheral nerve repair and reconstruction market is controlled by a handful of mid- to large medical device companies; however,
because the majority of the procedures use autograft or direct repair (i.e., directly suturing the nerve ends), we view these two older
techniques as the real competitors to AxoGen. The nerve conduit (i.e., short gaps) and protective nerve wrap market generates
approximately $55-$60 million in revenue annually and grows in the low- to mid-single-digit percentage range. We view these products
as belonging to the same segment as AxoGens AxoGuard products. On the other hand, the Avance Nerve Graft is a unique implant
that can address nerve injuries that previously could only be effectively treated with autologous nerve graft.
The market leader and an early developer of nerve conduits is Integra LifeSciences (IART, not rated). Integra offers NeuraGen, a
hollow conduit, and NeuraWrap, a nerve protector, both of which are made from reconstituted bovine collagen. Baxter International
(BAX, not rated) markets the Neurotube, which is an absorbable woven polyglycolic acid (PGA) mesh tube. Baxter obtained this
product as part of its acquisition of Synovis Life Technologies in February 2012. The Neurotube was not a material product at Synovis
and not viewed as an important driver for the acquisition. Stryker (SYK, not rated) sells the NeuroMatrix and Neuroflex products, which
are hollow conduits, and NeuroMend, which is a nerve wrapping; similar to Integra LifeSciences, Strykers products are made from
reconstituted bovine collagen.
The following figure summarizes the competitive landscape for the US nerve repair market and the US nerve conduit/wrap market,
where we only include AxoGens AxoGuard products (i.e., excludes Avance). We estimate that AxoGen became the number one player
in the US nerve market in 2014 driven by robust growth of its product portfolio. Within the conduit/wrap segment of the nerve market,
we estimate AxoGen controls 17% of the market, which we estimate increased from 10% in the prior year driven by rapid growth of its
AxoGuard Nerve Connector and AxoGuard Nerve Protector. In terms of new product introductions, Integra indicated during its 2014
Analyst Meeting (May 2014) that it planned to introduce a next-generation nerve product in 2016 designed to provide an environment to
encourage Schwann cell growth. We believe that having Integra invest more resources to shift nerve repair procedures toward tissuebased implants would be helpful for all participants, including AxoGen.

Figure 19: US Nerve Repair Market

Figure 20: US Nerve Conduit/Wrap Market

Other
6%

Other
7%
Integra
28%

Integra
33%

AxoGuard
(AxoGen)
17%

AxoGen
30%

Synovis/Baxter
16%

Synovis/Baxter
13%

Source: Company data, Wedbush Securities, Inc.

Stryker
23%

Stryker
27%

Source: Company data, Wedbush Securities, Inc.

Boeckstyns, et al., J Hand Surg Am. 2013 Dec;38(12):2405-11. doi: 10.1016/j.jhsa.2013.09.038. Epub 2013 Nov 5

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AxoGen | 18

Intellectual Property
AxoGen has licensed, as well as filed on its own, several key patents which cover all aspects surrounding Avance, including
processing, selection of grafts, and future enhancements. In particular, there are 6 issued US patents (listed in Figure 21), 4 pending
US patent applications, 3 issued international patents, and 9 pending international patent applications. Importantly, the estimated
expiration date of these patents spans from 2021 to 2032. Aside from patent protection, a significant amount of manufacturing and
tissue processing know how is required to produce a product like Avance. Further, as discussed previously, we also view FDAs
classification of nerve allograft tissue as a biologic product to be a further barrier to entry given the lengthy regulatory process involved
to garner FDA approval. Lastly, based on current law, if Avance were to obtain FDA approval as a biologic (which we expect in the
2019/20 timeframe), then it may be granted 12 years of marketing exclusivity from the date of approval. Assuming FDA approval of
Avance as a biologic in the 2019/20 timeframe, this would imply marketing exclusivity until 2031.

Figure 21: Avance US patent protection extends beyond 2021

Patent No.

Description

Estimated Expiration Date

US 6,972,168

Materials and Methods for Nerve Grafting, Selection of Nerve Grafts, and in vitro Nerve Tissue Culture

August 2021

US 7,402,319

Cell Free Tissue Replacement for Tissue Engineering

September 2023

US 7,732,200

Materials and Methods for Nerve Grafting, Selection of Nerve Grafts, and in vitro Nerve Tissue Culture

December 2022

US 6,696,575

Biodegradable, electrically conducting polymer for tissue engineering applications

March 2021

US 7,851,447

Materials and Methods for Nerve Repair

November 2023

US 8,545,485

Nerve Elevator and Method of Use

May 2032

Source: AxoGen, Company data, Wedbush Securities, Inc.

Formulations used in the companys AxoGuard product line, which are licensed from Cook Biotech, are covered under patents owned
by Cook that expire from August 2017 through November 2018. Because we view Avance as AxoGens flagship product, we believe it
would be difficult for a competitor to gain commercial traction by only offering products similar to AxoGuard; in addition, there is
significant processing and manufacturing know how required to develop a product similar to AxoGuard, which already has been used
in thousands of patients.

Management
Karen Zaderej, President and CEO
Ms. Zaderej has been AxoGens President, CEO, and member of its board of directors since September 2011. She has served as
AxoGen Corporations CEO and member of its board of directors since May 2010. Ms. Zaderej joined AxoGen in May 2006 as VP of
Marketing and Sales (May 2006 to October 2007) and in 2007, COO (October 2007 to May 2010). Prior to joining AxoGen, Ms. Zaderej
worked at Ethicon, Inc., a J&J company, where she held senior positions in marketing, business development, and R&D, as well as ran
a manufacturing business.
Lee Bob Johnston, Jr., CFO
Mr. Johnston joined AxoGen in May 2014 and serves as the companys CFO. Prior to joining AxoGen, Mr. Johnston was the SVP of
Corporate Development and CFO of Scientific Protein Laboratories, LLC, a pharmaceutical company recently acquired by Hepalink. As
CFO and COO of Ascension Orthopedics, he helped to complete the sale of the company to Integra LifeSciences. Prior to that, he
served as CFO of Tutogen Medical facilitating its sale to RTI Biologics.
Gregory G. Freitag, General Counsel and SVP of Business Development
Mr. Freitag, J.D., CPA, has served as AxoGens General Counsel, SVP of Business Development, and member of its board of directors
since May 2014. Before this, Mr. Freitag had served as AxoGens CFO, General Counsel, and member of its board of directors since
September 2011. Prior to joining AxoGen, he was CEO, CFO, and board member of LecTec from June 2010 to September 2011.
Previously, he was a Director of Business Development at Pfizer Health Solutions, a former subsidiary of Pfizer, Inc., and worked at
Tao Levy (212) 938-9948

AxoGen | 19

Guidant Corporation (acquired by Boston Scientific) in their business development group. In addition, he serves as a director of the
Foundation Board of HealthEast Care System, a health care system in Minnesota.
Jill F. Schiaparelli, Chief Marketing Officer
Ms. Schiaparelli joined AxoGen in February 2012 as the Senior Vice President of Business Strategy and Marketing and was recently
promoted to Chief Marketing Officer. Previously, she was the VP, Commercial Strategy, and Business Development for ApaTech, a
venture-back global orthopedic graft company based in the UK that was later acquired by Baxter Healthcare. Prior to that, Ms.
Schiaparelli was employed by Johnson & Johnson family of companies where she held several senior positions in strategic marketing,
marketing, sales operations, and healthcare analytics within the Ethicon Endo-Surgery, Ethicon and Healthcare Systems operating
companies.
John P. Engels, Vice President and Co-founder
Mr. Engels has served as AxoGens VP since September 2011. He is a co-founder of AxoGen Corporation, having served as the
companys VP since June 2006, providing operational and financial leadership and managing AxoGens strategic and product
development partnerships. From 1999-2002, Mr. Engels worked as a consultant for the University of Florida, Saffron Hill Ventures and
PA Early Stage Partners, among other companies. Mr. Engels is a member of the board of directors of Oxicool, Inc., a privately-held
company developing new cooling technologies.
Shawn McCarrey, Vice President of Sales
Mr. McCarrey has served as AxoGens SVP of Sales since February 2013. From January 2009 to May 2012, Mr. McCarrey served as
Executive VP of North American Cardiovascular Sales at Bayer Interventional/MEDRAD Interventional. Previously he held multiple
escalating positions within Possis Medical, Inc., a company that developed, manufactured, and marketed medical devices for the
cardiovascular treatment markets, and served as Director of Sales, VP of US Sales, VP of Worldwide Sales and EVP of Worldwide
Sales & Marketing. For more than 15 years prior to joining Possis, Mr. McCarrey held a variety of progressively responsible roles within
two divisions of C.R. Bard.

Risks to Achieving Our Price Target

Adoption of Avance and AxoGuard products is slower than expected
AxoGens Avance and AxoGuard product line (Nerve Protector and Nerve Connector) account for all of AxoGens revenue, which we
expect will still be the case over the next few years. Therefore, failure to increase adoption of these products could have a material
adverse impact on its business and financial results.

FDA views Avance as a biologic, thus AXGN will need to receive approval through a biologics license application
(BLA)
Although the FDA is allowing AxoGen to continue to market Avance as part of an agreed transition plan, while the company performs
clinical testing and prepares a BLA submission, the clinical results will not be available until the 2019/20 timeframe. As a result, the FDA
could require the company to conduct additional clinical/non-clinical testing, which could increase operating expenses and potentially
delay profitability; in addition, in the event the FDA becomes dissatisfied with AxoGens progress, the transition plan, or otherwise
changes its position regarding AxoGen being allowed to sell Avance, these events would have a material adverse effect on the
companys operations and financial results.

Competition
Although AxoGens technology has demonstrated characteristics that differentiate itself within the market place, if other competitors
develop superior or comparable products to AxoGens Avance or AxoGuard product line, this could reduce the potential market for
AxoGens products, render the products obsolete altogether, or place downward pricing pressure.

Need for additional capital

We forecast AxoGen to continue generating operating losses over the next 3 years. As a result, we do not expect its current cash
position to be sufficient to reach profitability and have assumed in our models that the company will need to raise additional capital in
order to continue implementing its growth strategy. If the company is able to execute on its current commercialization targets and given
the compelling value of Avance, the AxoGuard product line, and its rapid sales growth, we believe AxoGen should be able to raise
sufficient funds to address its future capital requirements (assuming a healthy capital markets environment).
Tao Levy (212) 938-9948

AxoGen | 20

Figure 22: AxoGen Revenue Build

1Q14

2Q14

3Q14

4Q14

1Q15E

2Q15E

3Q15E

4Q15E

2013

2014

2015E

2016E

2017E

2018E

2019E

Avance
Units

731

863

958

966

986

1,122

1,274

1,285

2,768

3,517

4,667

6,533

9,146

12,805

17,927

% change (yr/yr)
% change (q/q)

25%
0%

21%
18%

30%
11%

40%
1%

35%
2%

30%
14%

33%
14%

33%
1%

-26%

27%

33%

40%

40%

40%

40%

$2,400
$1.75
36%

$2,650
$2.29
33%

$2,650
$2.54
43%

$2,650
$2.56
46%

$2,650
$2.61
49%

$2,783
$3.12
37%

$2,783
$3.54
40%

$2,783
$3.58
40%

$2,358
$6.53

$2,598
$9.14
40%

$2,754
$12.85
41%

$2,865
$18.72
46%

$2,979
$27.25
46%

$3,098
$39.68
46%

$3,222
$57.77
46%

57%

55%

55%

55%

56%

54%

53%

53%

55%

54%

54%

54%

54%

55%

1,407

1,871

2,076

2,095

2,083

2,582

3,011

3,037

4,669

7,449

10,712

15,211

21,600

30,240

42,337

48%
13%

54%
33%

65%
11%

60%
1%

48%
-1%

38%
24%

45%
17%

45%
1%

31%

60%

44%

42%

42%

40%

40%

$940
$1.32
54%

$1,000
$1.87
63%

$1,000
$2.08
76%

$1,000
$2.09
80%

$1,000
$2.08
57%

$1,050
$2.71
45%

$1,050
$3.16
52%

$1,050
$3.19
52%

$932
$4.35

$989
$7.36
69%

$1,040
$11.14
51%

$1,061
$16.14
45%

$1,082
$23.38
45%

$1,104
$33.38
43%

$1,126
$47.67
43%

43%

45%

45%

45%

44%

46%

47%

47%

45%

46%

46%

46%

46%

45%

ASP($)
Avance Revenue($mm)
% change (yr/yr)
% of Tota l Re venue bei ng Ava nce

AxoGuard
Units
% change (yr/yr)
% change (q/q)

ASP($)
AxoGuard Revenue($mm)
% change (yr/yr)
% of Tota l Re venue bei ng AxoGua rd

Axogen Product Revenue($mm)

% change (yr/yr)
% change (q/q)

Grant Revenue ($mm)

Total Revenue ($mm)
% change (yr/yr)

$3.08

$4.16

$4.61

$4.65

$4.70

$5.83

$6.71

$6.76

$10.88

$16.50

$24.00

$34.86

$50.63

$73.06

$105.44

44%
6%

45%
35%

56%
11%

60%
1%

53%
1%

40%
24%

45%
15%

45%
1%

41%

52%

45%

45%

45%

44%

44%

$0.06

$0.06

$0.06

$0.14

$0.14

$0.14

$0.14

$0.14

$0.07

$0.32

$0.56

$0.56

$0.56

$0.56

$0.56

$3.14

$4.21

$4.67

$4.79

$4.84

$5.97

$6.84

$6.90

$10.95

$16.82

$24.55

$35.41

$51.18

$73.62

$106.00

46%

47%

58%

61%

54%

42%

47%

44%

42%

54%

46%

44%

45%

44%

44%

Source: Company data, Wedbush Securities, Inc.

Tao Levy (212) 938-9948

AxoGen | 21

Figure 23: AxoGen Income Statement ($ in millions, except EPS). FYE December
1Q14A

2Q14A

3Q14A

4Q14A

1Q15E

2Q15E

3Q15E

4Q15E

$0.06
$3.08
$3.14
0.70
2.44

$0.06
$4.16
$4.21
0.89
3.33

$0.06
$4.61
$4.67
0.90
3.78

$0.14
$4.65
$4.79
0.96
3.84

$0.14
$4.70
$4.84
1.11
3.72

$0.14
$5.83
$5.97
1.37
4.60

$0.14
$6.71
$6.84
1.57
5.27

$0.14
$6.76
$6.90
1.59
5.32

$0.07
$10.88
$10.95
2.44
8.51

$0.32
$16.50
$16.82
3.44
13.38

$0.56
$24.00
$24.55
5.65
18.91

$0.56
$34.86
$35.41
7.79
27.62

$0.56
$50.63
$51.18
11.26
39.92

$0.56
$73.06
$73.62
16.20
57.42

$0.56
$105.44
$106.00
23.32
82.68

2.72
1.89
0.81
5.43

3.35
1.71
0.56
5.62

3.25
1.65
0.68
5.58

3.87
1.69
0.98
6.55

4.11
2.03
0.73
6.87

5.08
1.79
0.84
7.70

5.00
1.78
0.96
7.73

5.87
1.79
1.04
8.70

10.26
5.72
2.13
18.10

13.19
6.95
3.03
23.18

20.05
7.40
3.55
31.00

25.50
7.79
3.90
37.18

31.73
8.19
4.35
44.27

38.28
8.47
4.42
51.16

44.52
8.80
5.30
58.62

($2.99)

($2.30)

($1.80)

($2.71)

($3.14)

($3.10)

($2.46)

($3.38)

($9.59)

($9.80)

($12.09)

($9.56)

($4.35)

$6.26

$24.06

(1.19)
(0.05)
0.00
(0.01)
(1.25)

(1.39)
(0.05)
0.00
0.00
(1.44)

(1.38)
(0.06)
0.00
0.00
(1.44)

(1.25)
(0.04)
0.00
0.01
(1.28)

(0.90)
(0.15)
0.00
0.00
(1.05)

(0.90)
(0.15)
0.00
0.00
(1.05)

(0.90)
(0.15)
0.00
0.00
(1.05)

(0.90)
(0.15)
0.00
0.00
(1.05)

(4.82)
(0.18)
0.00
0.03
(4.96)

(5.21)
(0.20)
0.00
0.00
(5.41)

(3.60)
(0.60)
0.00
0.00
(4.20)

(3.60)
(0.60)
0.00
0.00
(4.20)

(3.60)
(0.60)
0.00
0.00
(4.20)

(3.60)
(0.60)
0.00
0.00
(4.20)

Income / (Loss) Before Taxes

Income Taxes (benefit)

($4.24)
-

($3.74)
-

($3.24)
-

($3.99)
-

($4.19)
-

($4.15)
-

($3.51)
-

($4.43)
-

($14.56)
-

($15.21)
-

($16.29)
-

($13.76)
-

($8.55)
-

$2.06
$0.72

$19.86
$6.95

Net Income (adjusted)

Preferred Stock dividends
Net loss to common shareholders

($4.24)
0.00
($4.24)

($3.74)
0.00
($3.74)

($3.24)
0.00
($3.24)

($3.99)
0.00
($3.99)

($4.19)
0.00
($4.19)

($4.15)
0.00
($4.15)

($3.51)
0.00
($3.51)

($4.43)
0.00
($4.43)

($14.56)
0.00
($14.56)

($15.21)
0.00
($15.21)

($16.29)
0.00
($16.29)

($13.76)
0.00
($13.76)

($8.55)
0.00
($8.55)

$1.34
0.00
$1.34

$12.91
0.00
$12.91

Non-recurring Gain (losses)

Net Income (reported)
EPS: Operating
EPS: Reported
Average Shares
Margins
Gross Profit
yr/yr change
Sales and Marketing
General and administrative
SG&A
R&D
EBIT
Growth Rates (yr/yr)
Revenue
Gross Profit
Sales and Marketing
General and administrative
SG&A
R&D
Opex

0.00
($4.24)
($0.24)
($0.24)
17.38

0.00
($3.74)
($0.21)
($0.21)
17.46

0.00
($3.24)
($0.19)
($0.19)
17.47

(2.50)
($6.49)
($0.20)
($0.33)
19.49

0.00
($4.19)
($0.19)
($0.19)
22.05

0.00
($4.15)
($0.17)
($0.17)
24.62

0.00
($3.51)
($0.14)
($0.14)
24.82

0.00
($4.43)
($0.15)
($0.15)
29.02

0.00
($14.56)
($1.16)
($1.16)
12.52

(2.50)
($17.71)
($0.85)
($0.99)
17.95

0.00
($16.29)
($0.65)
($0.65)
25.13

0.00
($13.76)
($0.47)
($0.47)
29.33

0.00
($8.55)
($0.29)
($0.29)
29.53

0.00
$1.34
$0.04
$0.04
33.03

0.00
$12.91
$0.39
$0.39
33.53

Grant Revenue
Product Revenue
Total Revenue
Cost of Revenue
Gross Profit
Sales and Marketing
General and administrative
Research and Development
Total Operating Expenses
Operating Income (Loss)
Interest Inc. (Exp.)
Interest expense-deferred financing costs
Change in warrant liability
Other income (expense)
Total other income (expense)

2013A

2014A

2015E

2016E

2017E

2018E

2019E

(3.60)
(0.60)
0.00
0.00
(4.20)

77.7%

78.9%

80.8%

80.0%

77.0%

77.0%

77.0%

77.0%

77.7%

79.5%

77.0%

78.0%

78.0%

78.0%

78.0%

380bps

106bps

280bps

1bps

-65bps

-193bps

-382bps

-304bps

322bps

182bps

-253bps

100bps

0bps

0bps

0bps

87%
60%
147%
26%

80%
41%
120%
13%

70%
35%
105%
15%

81%
35%
116%
21%

85%
42%
127%
15%
-65%

85%
30%
115%
14%
-52%

73%
26%
99%
14%
-36%

85%
26%
111%
15%
-49%

94%
52%
146%
19%

78%
41%
120%
18%

82%
30%
112%
14%
-49%

72%
22%
94%
11%
-27%

62%
16%
78%
9%
-9%

52%
12%
64%
6%
9%

42%
8%
50%
5%
23%

46%
54%
44%
18%
32%
100%
39%

47%
49%
33%
23%
29%
12%
27%

58%
64%
18%
33%
23%
15%
22%

61%
61%
25%
15%
22%
57%
26%

54%
53%
51%
7%
33%
-11%
26%

42%
38%
51%
5%
35%
50%
37%

47%
40%
54%
8%
38%
41%
39%

44%
39%
52%
6%
38%
5%
33%

42%
48%
49%
9%
32%
49%
34%

54%
57%
29%
22%
26%
43%
28%

46%
41%
52%
6%
36%
17%
34%

44%
46%
27%
5%
21%
10%
20%

45%
45%
24%
5%
20%
12%
19%

44%
44%
21%
3%
17%
2%
16%

44%
44%
16%
4%
14%
20%
15%

Source: Company data, Wedbush Securities, Inc.

Tao Levy (212) 938-9948

AxoGen | 22

Figure 24: AxoGen Balance Sheet ($ in millions)

1Q14

2Q14

3Q14

4Q14

2014

1Q15E

2Q15E

3Q15E

4Q15E

2015E

2016E

2017E

2018E

2019E

16.8
2.0
3.5
0.2

14.2
2.5
3.4
0.1

11.8
2.7
3.3
0.1

8.2
2.9
3.2
0.1

8.2
2.9
3.2
0.1

16.8
3.3
3.9
0.2

12.3
3.6
4.1
0.2

8.0
4.0
4.8
0.2

19.0
4.4
5.3
0.3

19.0
4.4
5.3
0.3

28.3
6.0
6.6
0.4

15.3
8.7
9.6
0.6

11.3
12.5
13.8
0.8

17.6
17.5
19.4
1.2

22.4

20.3

18.0

14.4

14.4

24.2

20.3

17.1

29.0

29.0

41.3

34.2

38.4

55.6

0.5
0.0
0.6
1.0
0.0
2.1

0.6
0.0
0.6
1.0
0.0
2.1

0.6
0.0
0.6
0.9
0.0
2.1

0.6
0.0
0.6
0.8
0.0
2.0

0.6
0.0
0.6
0.8
0.0
2.0

0.6
0.0
0.6
0.8
0.0
2.0

0.6
0.0
0.6
0.8
0.0
2.0

0.6
0.0
0.6
0.8
0.0
2.0

0.6
0.0
0.6
0.8
0.0
2.0

0.6
0.0
0.6
0.8
0.0
2.0

1.1
0.0
0.6
0.8
0.0
2.5

2.1
0.0
0.6
0.8
0.0
3.5

2.6
0.0
0.6
0.8
0.0
4.0

3.1
0.0
0.6
0.8
0.0
4.5

24.6

22.4

20.1

16.4

16.4

26.2

22.3

19.1

31.0

31.0

43.8

37.6

42.3

60.1

1.9
0.0
0.0
1.9

2.2
0.0
0.0
2.2

2.0
0.0
0.0
2.0

2.4
0.0
0.0
2.4

2.4
0.0
0.0
2.4

2.8
0.0
0.0
2.8

3.0
0.0
0.0
3.1

3.4
0.0
0.0
3.4

3.7
0.0
0.0
3.7

3.7
0.0
0.0
3.7

5.3
0.0
0.0
5.3

7.7
0.0
0.0
7.7

11.0
0.0
0.0
11.1

15.9
0.0
0.0
15.9

Non-current liabilities
Long-term debt
Long-term deferred revenue

26.3

27.3

28.2

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

25.1
0.1

Total liabilities

28.2

29.6

30.3

27.6

27.6

28.0

28.3

28.6

28.9

28.9

30.5

32.9

36.3

41.1

0.2
72.8
-76.6
-3.7

0.2
73.0
-80.4
-7.2

0.2
73.3
-83.6
-10.2

0.2
78.7
-90.1
-11.2

0.2
78.7
-90.1
-11.2

0.2
92.3
-94.3
-1.8

0.2
92.3
-98.5
-6.0

0.2
92.3
-102.0
-9.5

0.2
108.3
-106.4
2.1

0.2
108.3
-106.4
2.1

0.2
133.3
-120.2
13.3

0.2
133.3
-128.7
4.7

0.2
133.3
-127.4
6.1

0.2
133.3
-114.5
19.0

24.6

22.4

20.1

16.4

16.4

26.2

22.3

19.1

31.0

31.0

43.8

37.6

42.3

60.1

Current assets:
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses and other
Deferred financing costs
Total current assets
Non-current assets:
Property and equipment, net
Goodwill
Intangible assets
Deferred financing costs
Other assets
Total non-current assets
Total Assets
Current liabilities:
Accounts payable and accrued expenses
Current portion of long-term debt
Current deferred revenue
Total current liabilities

Stockholders' equity:
Common Stock
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity

Source: Company data, Wedbush Securities, Inc.

Tao Levy (212) 938-9948

AxoGen | 23

Figure 25: AxoGen Cash Flow Statement ($ in millions)

1Q14

2Q14

3Q14

4Q14

2014

1Q15E

2Q15E

3Q15E

4Q15E

2015E

-$4.2

-$3.7

-$3.2

-$6.5

-$17.7

-$4.2

-$4.2

-$3.5

-$4.4

-$16.3

-$13.8

-$8.6

$1.3

$12.9

Depreciation and amortization

$0.1

$0.1

$0.1

$0.1

$0.4

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

Change in working capital

$0.6

$0.8

$0.6

$2.8

$4.7

-$0.8

-$0.3

-$0.7

-$0.6

-$2.5

-$1.5

-$3.4

-$4.9

-$6.1

Other

$0.4

$0.3

$0.3

$1.1

$2.1

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

-$3.2

-$2.6

-$2.3

-$2.5

-$10.5

-$5.0

-$4.5

-$4.2

-$5.0

-$18.8

-$15.2

-$12.0

-$3.6

$6.8

Capital Expenditure

-$0.2

-$0.1

-$0.1

-$0.2

-$0.5

$0.0

$0.0

$0.0

$0.0

$0.0

-$0.5

-$1.0

-$0.5

-$0.5

Other

$0.0

$0.0

$0.0

$0.0

-$0.1

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

-$0.2

-$0.1

-$0.1

-$0.2

-$0.6

$0.0

$0.0

$0.0

$0.0

$0.0

-$0.5

-$1.0

-$0.5

-$0.5

Changes in debt

$0.0

$0.0

$0.0

-$2.6

-$2.6

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

Addtl Proceeds (options, common)

$0.1

$0.0

$0.0

$1.6

$1.8

$13.6

$0.0

$0.0

$16.0

$29.6

$25.0

$0.0

$0.0

$0.0

$0.1

$0.0

$0.0

-$0.9

-$0.8

$13.6

$0.0

$0.0

$16.0

$29.6

$25.0

$0.0

$0.0

$0.0

Net Income

2016E 2017E 2018E 2019E

Adjustments to reconcile net income to net cash

used for operating activities:

Cash from Operating Activities

Cash from Investing Activities

Cash from Financing Activities

Net Change in Cash

-$3.3

-$2.6

-$2.3

-$3.6

-$11.9

$8.6

-$4.5

-$4.2

$11.0

$10.8

$9.3

-$13.0

-$4.1

$6.3

Net Cash - Beginning Balance

20.1

$16.8

$14.2

$11.8

$20.1

$8.2

$16.8

$12.3

$8.0

$8.2

$19.0

$28.3

$15.3

$11.3

Net Cash - Ending Balance

$16.8

$14.2

$11.8

$8.2

$8.2

$16.8

$12.3

$8.0

$19.0

$19.0

$28.3

$15.3

$11.3

$17.6

Source: Company data, Wedbush Securities, Inc.

Tao Levy (212) 938-9948

AxoGen | 24

Analyst Biography
Tao Levy is a Managing Director at Wedbush Securities providing research coverage of the Medical Devices sector. He has over a
decade of equity research experience covering the Medical Devices sector and was previously a Senior Research Analyst at Deutsche
Bank and Collins Stewart.
Mr. Levy received his BA in Biology from the University of Pennsylvania.
Tao's Edge: Having covered the sector for 13 years, Mr. Levy uses his extensive network of industry and clinician contacts to identify
subtle changes in the Medical Devices sector and understand how they might impact the outlook for the Medical Device companies he
follows.

Analyst Certification
I, Tao Levy, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or
indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report.

Covered Public Companies Mentioned in this Report (priced as of close Mar-10-2015)

COMPANY

TICKER

RATING

PRICE

PRICE TARGET

AxoGen

AXGN

OUTPERFORM

$3

$5

Intersect ENT

XENT

OUTPERFORM

$24

$25

Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ414.pdf

Investment Rating System:

Outperform: Expect the total return of the stock to outperform relative to the median total return of the analysts (or the analysts team) coverage
universe over the next 6-12 months.
Neutral: Expect the total return of the stock to perform in-line with the median total return of the analysts (or the analysts team) coverage
universe over the next 6-12 months.
Underperform: Expect the total return of the stock to underperform relative to the median total return of the analysts (or the analysts team)
coverage universe over the next 6-12 months.
The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the
other stocks in the analysts coverage universe (or the analysts team coverage).*
Rating Distribution
(as of December 31, 2014)
Outperform:58%
Neutral: 39%
Underperform: 3%

Investment Banking Relationships

(as of December 31, 2014)
Outperform:19%
Neutral: 2%
Underperform: 0%

The Distribution of Ratings is required by FINRA rules; however, WS stock ratings of Outperform, Neutral, and Underperform most closely
conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS stock ratings are on a relative
basis.
The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The
analysts receive compensation that is based upon various factors including WS total revenues, a portion of which are generated by WS
investment banking activities.
Wedbush Equity Research Disclosures as of March 11, 2015
Company

Disclosure

AxoGen
Intersect ENT

1,2,5,7
1,3,4,5

Research Disclosure Legend

1.
WS makes a market in the securities of the subject company.
2.
WS managed a public offering of securities within the last 12 months.
3.
WS co-managed a public offering of securities within the last 12 months.
4.
WS has received compensation for investment banking services within the last 12 months.
5.
WS provided investment banking services within the last 12 months.
Tao Levy (212) 938-9948

AxoGen | 25

6.
7.
8.
9.
10.
11.
12.

WS is acting as financial advisor.

WS expects to receive compensation for investment banking services within the next 3 months.
WS provided non-investment banking securities-related services within the past 12 months.
WS has received compensation for products and services other than investment banking services within the past 12 months.
The research analyst, a member of the research analysts household, any associate of the research analyst, or any individual
directly involved in the preparation of this report has a long position in the common stocks.
WS or one of its affiliates beneficially own 1% or more of the common equity securities.
The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the companys meeting
certain clinical and regulatory milestones.

Price Charts
Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for
companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until
the following quarter. Additional information on recommended securities is available on request.

* WS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Outperform/ Neutral/Underperform) on July 14, 2009.
Please access the attached hyperlink for WS Coverage Universe: http://www.wedbush.com/services/cmg/equities-division/research/equityresearch Applicable disclosure information is also available upon request by contacting Ellen Kang in the Research Department at (213) 6884529, by email to ellen.kang@wedbush.com, or the Business Conduct Department at (213) 688-8090. You may also submit a written request
to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.

OTHER DISCLOSURES
RESEARCH DEPT. * (213) 688-4505 * www.wedbush.com
EQUITY TRADING Los Angeles (213) 688-4470 / (800) 421-0178 * EQUITY SALES Los Angeles (800) 444-8076
Tao Levy (212) 938-9948

AxoGen | 26

CORPORATE HEADQUARTERS (213) 688-8000

The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a
representation by this corporation, nor is any recommendation made herein based on any privileged information. This information is not intended to be
nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned
herein. This firm, Wedbush Securities, its officers, employees, and members of their families, or any one or more of them, and its discretionary and
advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or sales
thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The
herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional information with respect to the
information contained herein may be obtained upon request.

Tao Levy (212) 938-9948

AxoGen | 27

EQUITY RESEARCH DEPARTMENT

(213) 688-4529

DIRECTOR OF RESEARCH
Mark D. Benson (213) 688-4435
MANAGER, RESEARCH OPERATIONS
Ellen Kang (213) 688-4529

RETAIL AND CONSUMER

TECHNOLOGY, INTERNET, MEDIA & SOCIAL MEDIA

LIFE SCIENCES AND HEALTH CARE

Biotechnology/Biopharmaceuticals
David M. Nierengarten, Ph.D.
(415) 274-6862
Dilip Joseph
(415) 273-7308

Healthy Lifestyles
Phil Terpolilli

(212) 833-1367

Communications & Cloud Infrastructure

Scott Thompson
(212) 938-9933

Leisure
James Hardiman, CFA CPA
Sean Wagner

(212) 833-1362
(212) 833-1363

Communications and Application Software

Shyam Patil, CFA
(213) 688-8062
(213) 688-4548
Andy Cheng

(213) 688-4519
(213) 688-6624

Enterprise Software
Steve Koenig
Jae Cho

(415) 274-6801
(212) 938-9937

Entertainment: Retail
Michael Pachter
Alicia Reese
Nick McKay

(213) 688-4474
(212) 938-9927
(213) 688-4343

Restaurants
Nick Setyan
Colin Radke

Specialty Retail: Hardlines

Seth Basham, CFA
(212) 938-9954
John Garrett, CFA
(213) 688-4523
Specialty Retail: Softlines
Morry Brown, CFA
Taryn Kuida

(213) 688-4311
(213) 688-4505

Heather Behanna, Ph.D.

(415) 274-6874

Emerging Pharmaceuticals
Liana Moussatos, Ph.D.

(415) 263-6626

Healthcare Services - Managed Care

Sarah James
(213) 688-4503
Medical Devices
Tao Levy

Medical Diagnostics and Life Sciences Tools

Zarak Khurshid
(415) 274-6823

Entertainment: Software
Michael Pachter
Nick McKay

(213) 688-4474
(213) 688-4343

Financial Technology
Gil B. Luria
Aaron Turner

(213) 688-4501
(213) 688-4429

Internet: Media and Gaming

Michael Pachter
Nick McKay
Alicia Reese

(213) 688-4474
(213) 688-4343
(212) 938-9927

RETAIL CHANNEL CHECKING GROUP

Lupine Skelly

(505) 417-5427

INDUSTRIAL GROWTH TECHNOLOGY

Environmental Services / Building Products
Al Kaschalk
(213) 688-4539
Water and Renewable Energy Solutions
David Rose, CFA
(213) 688-4319
James Kim
(213) 688-4380

EQUITY SALES
Los Angeles
San Francisco
New York
Boston
Minneapolis
Chicago

Internet: Social Media, Advertising & Technology

Shyam Patil, CFA
(213) 688-8062
(213) 688-4548
Andy Cheng
Media
James Dix, CFA

(213) 688-4315

Movies and Entertainment

Michael Pachter
Alicia Reese
Nick McKay

(213) 688-4474
(212) 938-9927
(213) 688-4343

Semiconductors
Betsy Van Hees
Ryan Jue, CFA

(415) 274-6869
(415) 263-6669

(213) 688-4470 / (800) 444-8076

(415) 274-6800
(212) 938-9931
(617) 832-3700
(213) 688-6671
(213) 688-4418

(212) 938-9948

EQUITY TRADING
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San Francisco
New York
Boston
Milwaukee

CORPORATE HEADQUARTERS
1000 Wilshire Blvd., Los Angeles, CA 90017-2465
Tel: (213) 688-8000 www.wedbush.com

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(212) 344-2382
(617) 832-3700
(213) 688-4475