AxoGen

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Medical Devices

March 11, 2015 Price

$3.20 Rating

OUTPERFORM 12-Month Price Target

$5

Tao Levy (212) 938-9948 [email protected]

Company Information Shares Outst (M) 24.6 Market Cap (M) $80 52-Wk Range $2.11 - $4.24 Book Value/sh NA Cash/sh $0.68 Enterprise Value (M) $88.6 LT Debt/Cap % 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 .

AxoGen (AXGN) 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 company’s 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 autograft’s 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 Avance’s 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 2015E 2016E

REV (M) ACTUAL CURR. PREV. CONS. CURR. PREV. CONS.

Q1 Mar $3.1A $4.8E 4.8E -- -- Q2 Jun 4.2A $6.0E 5.6E -- -- Q3 Sep 4.7A $6.8E 6.5E -- -- Q4 Dec 4.8A $6.9E 6.8E -- -- Year* $16.8A $24.6E $23.8E $35.4E $32.1E Change 53.6% 46.0% 44.2% 2014A 2015E 2016E

EPS ACTUAL CURR. PREV. CONS. CURR. PREV. CONS.

Q1 Mar ($0.24)A ($0.19)E (0.15)E -- -- Q2 Jun (0.21)A ($0.17)E (0.13)E -- -- Q3 Sep (0.19)A ($0.14)E (0.12)E -- -- Q4 Dec (0.20)A ($0.15)E (0.10)E -- -- Year* ($0.85)A ($0.65)E ($0.48)E ($0.47)E ($0.29)E P/E Change

Consensus estimates are from Thomson First Call. * Numbers may not add up due to rounding.

Source: Thomson Reuters

Tao Levy (212) 938-9948 AxoGen | 2

TABLE OF CONTENTS

Investment Overview 3 Financial Review and Outlook 3 Valuation: OUTPERFORM and $5 Price Target 5 An Introduction to Peripheral Nerve Repair 6 AxoGen’s Product Portfolio 9 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

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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 company’s 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 AxoGen’s 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 AXGN’s focus to continue on the U.S. market, where it generated essentially all of the company’s 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 well-positioned 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 AxoGen’s 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 company’s 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

AxoGen’s 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 management’s 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 | 4

may be more appropriate for Avance (e.g., oral maxillofacial). AxoGen’s 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)

$7.7 $10.9 $16.8 $24.6

$35.4 $51.2

$73.6

$106.0

($10.2) ($14.6) ($15.2) ($16.3) ($13.8) ($8.6)

$1.3 $12.9

($40)

($20)

$0

$20

$40

$60

$80

$100

$120

2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E

$ in

Mill

ions

Revenue Net income (loss)

Source: Company data, Wedbush Securities, Inc.

Fiscal 2015 Outlook: Leveraging its 2014 Momentum. During AxoGen’s 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-to-peer 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).

We forecast 2015 AxoGen revenue of $24.6 million (+46% yr/yr). Due to historical seasonality trends in the company’s business, we expect sales to be sequentially flat in 1Q15, but to accelerate as the year progresses. In addition, with just over half of the company’s 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 AxoGen’s 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 company’s 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.

Figure 2: AxoGen Revenue Breakdown for 2014

Avance, 55%

AxoGuard, 45%

2014A


Tao Levy (212) 938-9948 AxoGen | 5

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 AxoGen’s 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 company’s 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 AxoGen’s 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, AxoGen’s 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 AXGN’s 2018 sales estimate of approximately $70 million (1st 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)

Share Market Revenue est. EV/Rev Rev. Growth (Yr/Yr)Company Name Ticker Price (2) Cap EV CY2014 CY2015 CY2016 CY14 CY15E CY16E 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%

Group Average 6.7x 5.3x 3.7x 72% 46% 78%

AxoGen AXGN $3.25 $80 $88 $17 $25 $35 5.3x 3.6x 2.5x 46% 44% 80%

premium (discount) -22% -32% -33%

(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

Latest reported Qtr GM

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 | 6

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

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

Figure 5: Structure of a neuron

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.

http://www.urmc.rochester.edu/

http://brainstormpsychology.blogspot.com/

Tao Levy (212) 938-9948 AxoGen | 7

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.

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 patient’s 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.

Figure 6: Cross-section of a peripheral nerve

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

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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 nerves) play a useful role in peripheral nerve injury repairs and have led to a nerve repair market that generates approximately $50-$60 million in annual sales. This is a market in which AxoGen’s 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.

Figure 7: Using the sural nerve as a source for the autograft

Nerve reconstruction using autograft Sural nerve harvesting

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

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AxoGen’s Product Portfolio

AxoGen’s 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 nervesup 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 Health’s 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 AxoGen’s 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

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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 body’s 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 AxoGen’s 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 axonal regeneration1. Because AxoGen’s 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 body’s 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 Avance’s 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.

1 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):6206–6213

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One of the important aspects of AxoGen’s 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.

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 product’s 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)


Figure 10: Avance Nerve Graft tissue processing


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Latest Ranger Study. As of January 2015, the database included over 600 individual nerve repairs from 18 center and 40 surgeons.

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 5-65mm). 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 difference, see Figure 12).2

At the 5th 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).

2 We would highlight that in 2013 the Ranger study was expanded by adding contemporary control groups, which enabled a more direct comparison of Avance’s 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.

Figure 12: Summary of processed nerve allograft matched to tube conduit and autograft by gap length

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

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

90%80%

87%

0%

25%

50%

75%

100%

5 - 14 mm 15 - 29 mm 30 - 65 mm

Injuries Achieving Meaningful Recovery by Gap Length

Source: 5th Vienna Symposium on Surgery of Peripheral Nerves, AxoGen, Company data, Wedbush Securities, Inc.

http://meeting.handsurgery.org/abstracts/2015/115.cgi

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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 improved sensation). The study enrolled 23 subjects with 31 digital nerve injuries (5-20 mm in length) and had follow-up on 18 patients. Results of the CHANGE study, presented at the January 2014 AAHS meeting, showed that the Avance Nerve Graft group had a statistically significant improvement in nerve recovery than the conduit group, at 12 months. We believe these data are in the process of being submitted for publication in a scientific journal.

RECON Study. Recon is a prospective, multicenter, randomized, subject and evaluator blinded comparative study of nerve cuffs (conduits) and Avance evaluating recovery outcomes for the repair of nerve discontinuities and represents AxoGen’s biologic license application (BLA) phase 3 clinical trial, which is expected to enroll 150 patients; we expect the trial to commence later in 2015 (see next section for further details).

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

Study/Author Nerve TypeNumber of

Nerves

Meaningful Recovery/Positive

OutcomesYear

Published Implant/Surgical Approach

RANGER Sensory, mixed, and motor 55* 87% 2012 Avance

Sensory 55 89% Avance

Mixed 13 77% Avance

Motor 7 86% Avance

Wangensteen and Ka l l ia inen Sensory, mixed, and motor 64 43% 2009 NeuraGen Type 1 Bovine Col lague Tube

Kim and Kl ine Sensory, mixed, and motor 52 67%-86% 2001-2006 Direct Suture and Autograft

Frykman and Gramyk Mixed nerves 91 75%-78% 1991 Direct Suture and Autograft

Frykman and Gramyk Sensory nerves 384 80% 1991 Autograft for Digi ta l Nerve Injury under 5 cm

Weber et a l . Sensory nerves 62 74% 2000 Neurotube PGA tube

Weber et a l . Sensory nerves 74 86% 2000 Direct Suture and Autograft

Ka l l io et a l . Sensory nerves 254 70% 1993 Autograft and Direct Repair

Haug, et a l . Sensory nerves 45 40% 2013 NeuraGen Type 1 Bovine Col lague 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.

Figure 14: CHANGE Study - Avance Nerve Graft reported greater sensory recovery than hollow tube conduit at month 12

0

2

4

6

8

10

12

14

16

Baseline Month 3 Month 6 Month 9 Month 122

Poin

t Dis

crim

inat

ion

Avance Nerve Graft Conduit


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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 agency’s 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 company’s progress and timeline; as a result, while AxoGen pursues the BLA, we expect the FDA’s 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 FDA’s regulatory change, FDA has taken a pragmatic approach in handling Avance’s 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 agency’s 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 AxoGen’s 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 AxoGen’s products across additional surgical indications, we believe this could further increase the company’s 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,

Tao Levy (212) 938-9948 AxoGen | 15

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 700,000 Calculation

B % involving a "gap" 58%

C No. of PNI repairs involving a gap ("Gap Repair") 406,000 A*B

D % treatable with Avance graft 44%

E No. of PNI repairs addressable with Avance 178,640 C*D

F Avg. # of Grafts/procedure 1.4

G Avance Nerve Graft Market Opportunity (units) 250,096 E*F

H ASP ($) $2,700

I Avance Extremity market opportunity ($ millions) $675 G*H

J Connector procedure opportunity (extremity) 56% (1) 1-D

K No. of PNI repairs addressable with AxoGuard Connector ("Primary Repair") 227,360 C*J

L ASP ($) $700

M AxoGuard Nerve Connector Extremity market opportunity ($ millions) $159 K*L

N % PNI repairs with no "gap" 42% 1-B

O No. of PNI repairs addressable with AxoGuard Wrap 294,000 A*N

P ASP ($) $1,600Q AxoGuard Nerve Protector Extremity market opportunity ($ millions) $470 O*P

Total US Extremity Market Opportunity ($ millions) $1,305 I+M+Q

(1) excludes long ga ps


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 AxoGen’s Nerve Protector to minimize soft tissue attachments (scarring)

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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 No. of US Carpal Tunnel Syndrome surgical repair procedures 500,000 Calculation

S % of surgeries that require a revision 20%

T No. of Carpal Tunnel Syndrome repeat surgeries 100,000 R*S

U ASP ($) - AxoGuard Protector $1,600

Carpal Tunnel Syndrome market opportunity ($ millions) $160 T*U


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 No. of US Oral and Maxillofacial injuries 68,000 Calculation

W % of surgeries treatable with Avance and Nerve Protector 100%

X No. of applicable injuries 68,000 V*W

Y ASP ($) of Avance and AxoGuard Protector $1,900

Oral Maxillofacial market opportunity ($ millions) $129 X*Y


Other peripheral nerve injury market opportunities Surgeons have used AxoGen’s 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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Commercialization Strategy

AxoGen’s 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 company’s momentum going forward.

1) Improve awareness of AxoGen’s 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 AxoGen’s 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 AxoGen’s 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 AxoGen’s 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 AXGN’s 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. AXGN’s 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 AxoGen’s 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 AxoGen’s 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 hospital’s costs come out of this payment, it is in the institution’s best interest to minimize operating room time, which accounts for a significant portion of the procedure’s 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

Tao Levy (212) 938-9948 AxoGen | 18

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 to directly suturing the nerve ends.3

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 AxoGen’s 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, Stryker’s 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 AxoGen’s 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 tissue-based implants would be helpful for all participants, including AxoGen.

Figure 19: US Nerve Repair Market

Integra28%

Stryker23%

Synovis/Baxter13%

AxoGen30%

Other6%


Figure 20: US Nerve Conduit/Wrap Market

Integra33%

Stryker27%

Synovis/Baxter16%

AxoGuard (AxoGen)

17%

Other7%


3 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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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 FDA’s 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


Formulations used in the company’s 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 AxoGen’s 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 AxoGen’s President, CEO, and member of its board of directors since September 2011. She has served as AxoGen Corporation’s 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 company’s 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 AxoGen’s General Counsel, SVP of Business Development, and member of its board of directors since May 2014. Before this, Mr. Freitag had served as AxoGen’s 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 | 20

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 AxoGen’s VP since September 2011. He is a co-founder of AxoGen Corporation, having served as the company’s VP since June 2006, providing operational and financial leadership and managing AxoGen’s 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 AxoGen’s 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

AxoGen’s Avance and AxoGuard product line (Nerve Protector and Nerve Connector) account for all of AxoGen’s 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 AxoGen’s 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 company’s operations and financial results.

Competition

Although AxoGen’s technology has demonstrated characteristics that differentiate itself within the market place, if other competitors develop superior or comparable products to AxoGen’s Avance or AxoGuard product line, this could reduce the potential market for AxoGen’s 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).

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Figure 22: AxoGen Revenue Build

1Q14 2Q14 3Q14 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 2013 2014 2015E 2016E 2017E 2018E 2019E

AvanceUnits 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) 25% 21% 30% 40% 35% 30% 33% 33% -26% 27% 33% 40% 40% 40% 40%% change (q/q) 0% 18% 11% 1% 2% 14% 14% 1%

ASP($) $2,400 $2,650 $2,650 $2,650 $2,650 $2,783 $2,783 $2,783 $2,358 $2,598 $2,754 $2,865 $2,979 $3,098 $3,222Avance Revenue($mm) $1.75 $2.29 $2.54 $2.56 $2.61 $3.12 $3.54 $3.58 $6.53 $9.14 $12.85 $18.72 $27.25 $39.68 $57.77% change (yr/yr) 36% 33% 43% 46% 49% 37% 40% 40% 40% 41% 46% 46% 46% 46%% of Tota l Revenue being Avance 57% 55% 55% 55% 56% 54% 53% 53% 55% 54% 54% 54% 54% 55%

AxoGuardUnits 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% change (yr/yr) 48% 54% 65% 60% 48% 38% 45% 45% 31% 60% 44% 42% 42% 40% 40%% change (q/q) 13% 33% 11% 1% -1% 24% 17% 1%

ASP($) $940 $1,000 $1,000 $1,000 $1,000 $1,050 $1,050 $1,050 $932 $989 $1,040 $1,061 $1,082 $1,104 $1,126AxoGuard Revenue($mm) $1.32 $1.87 $2.08 $2.09 $2.08 $2.71 $3.16 $3.19 $4.35 $7.36 $11.14 $16.14 $23.38 $33.38 $47.67% change (yr/yr) 54% 63% 76% 80% 57% 45% 52% 52% 69% 51% 45% 45% 43% 43%% of Tota l Revenue being AxoGuard 43% 45% 45% 45% 44% 46% 47% 47% 45% 46% 46% 46% 46% 45%

Axogen Product Revenue($mm) $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% change (yr/yr) 44% 45% 56% 60% 53% 40% 45% 45% 41% 52% 45% 45% 45% 44% 44%% change (q/q) 6% 35% 11% 1% 1% 24% 15% 1%

Grant Revenue ($mm) $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

Total Revenue ($mm) $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% change (yr/yr) 46% 47% 58% 61% 54% 42% 47% 44% 42% 54% 46% 44% 45% 44% 44%


Tao Levy (212) 938-9948 AxoGen | 22

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

1Q14A 2Q14A 3Q14A 4Q14A 1Q15E 2Q15E 3Q15E 4Q15E 2013A 2014A 2015E 2016E 2017E 2018E 2019E

Grant Revenue $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 $0.56Product Revenue $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 $105.44Total Revenue $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

Cost of Revenue 0.70 0.89 0.90 0.96 1.11 1.37 1.57 1.59 2.44 3.44 5.65 7.79 11.26 16.20 23.32Gross Profit 2.44 3.33 3.78 3.84 3.72 4.60 5.27 5.32 8.51 13.38 18.91 27.62 39.92 57.42 82.68

Sales and Marketing 2.72 3.35 3.25 3.87 4.11 5.08 5.00 5.87 10.26 13.19 20.05 25.50 31.73 38.28 44.52General and administrative 1.89 1.71 1.65 1.69 2.03 1.79 1.78 1.79 5.72 6.95 7.40 7.79 8.19 8.47 8.80Research and Development 0.81 0.56 0.68 0.98 0.73 0.84 0.96 1.04 2.13 3.03 3.55 3.90 4.35 4.42 5.30

Total Operating Expenses 5.43 5.62 5.58 6.55 6.87 7.70 7.73 8.70 18.10 23.18 31.00 37.18 44.27 51.16 58.62

Operating Income (Loss) ($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

Interest Inc. (Exp.) (1.19) (1.39) (1.38) (1.25) (0.90) (0.90) (0.90) (0.90) (4.82) (5.21) (3.60) (3.60) (3.60) (3.60) (3.60)Interest expense-deferred financing costs (0.05) (0.05) (0.06) (0.04) (0.15) (0.15) (0.15) (0.15) (0.18) (0.20) (0.60) (0.60) (0.60) (0.60) (0.60)Change in warrant liabil ity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Other income (expense) (0.01) 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.03 0.00 0.00 0.00 0.00 0.00 0.00

Total other income (expense) (1.25) (1.44) (1.44) (1.28) (1.05) (1.05) (1.05) (1.05) (4.96) (5.41) (4.20) (4.20) (4.20) (4.20) (4.20)

Income / (Loss) Before Taxes ($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 $19.86Income Taxes (benefit) - - - - - - - - - - - - - $0.72 $6.95

Net Income (adjusted) ($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) $1.34 $12.91Preferred Stock dividends 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net loss to common shareholders ($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) $1.34 $12.91

Non-recurring Gain (losses) 0.00 0.00 0.00 (2.50) 0.00 0.00 0.00 0.00 0.00 (2.50) 0.00 0.00 0.00 0.00 0.00Net Income (reported) ($4.24) ($3.74) ($3.24) ($6.49) ($4.19) ($4.15) ($3.51) ($4.43) ($14.56) ($17.71) ($16.29) ($13.76) ($8.55) $1.34 $12.91EPS: Operating ($0.24) ($0.21) ($0.19) ($0.20) ($0.19) ($0.17) ($0.14) ($0.15) ($1.16) ($0.85) ($0.65) ($0.47) ($0.29) $0.04 $0.39EPS: Reported ($0.24) ($0.21) ($0.19) ($0.33) ($0.19) ($0.17) ($0.14) ($0.15) ($1.16) ($0.99) ($0.65) ($0.47) ($0.29) $0.04 $0.39Average Shares 17.38 17.46 17.47 19.49 22.05 24.62 24.82 29.02 12.52 17.95 25.13 29.33 29.53 33.03 33.53Margins

Gross Profit 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% yr/yr change 380bps 106bps 280bps 1bps -65bps -193bps -382bps -304bps 322bps 182bps -253bps 100bps 0bps 0bps 0bps

Sales and Marketing 87% 80% 70% 81% 85% 85% 73% 85% 94% 78% 82% 72% 62% 52% 42%General and administrative 60% 41% 35% 35% 42% 30% 26% 26% 52% 41% 30% 22% 16% 12% 8%SG&A 147% 120% 105% 116% 127% 115% 99% 111% 146% 120% 112% 94% 78% 64% 50%R&D 26% 13% 15% 21% 15% 14% 14% 15% 19% 18% 14% 11% 9% 6% 5%EBIT -65% -52% -36% -49% -49% -27% -9% 9% 23%

Growth Rates (yr/yr)Revenue 46% 47% 58% 61% 54% 42% 47% 44% 42% 54% 46% 44% 45% 44% 44%Gross Profit 54% 49% 64% 61% 53% 38% 40% 39% 48% 57% 41% 46% 45% 44% 44%Sales and Marketing 44% 33% 18% 25% 51% 51% 54% 52% 49% 29% 52% 27% 24% 21% 16%General and administrative 18% 23% 33% 15% 7% 5% 8% 6% 9% 22% 6% 5% 5% 3% 4%SG&A 32% 29% 23% 22% 33% 35% 38% 38% 32% 26% 36% 21% 20% 17% 14%R&D 100% 12% 15% 57% -11% 50% 41% 5% 49% 43% 17% 10% 12% 2% 20%Opex 39% 27% 22% 26% 26% 37% 39% 33% 34% 28% 34% 20% 19% 16% 15%


Tao Levy (212) 938-9948 AxoGen | 23

Figure 24: AxoGen Balance Sheet ($ in millions)

1Q14 2Q14 3Q14 4Q14 2014 1Q15E 2Q15E 3Q15E 4Q15E 2015E 2016E 2017E 2018E 2019E

Current assets:Cash and cash equivalents 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 17.6Accounts receivable 2.0 2.5 2.7 2.9 2.9 3.3 3.6 4.0 4.4 4.4 6.0 8.7 12.5 17.5Inventory 3.5 3.4 3.3 3.2 3.2 3.9 4.1 4.8 5.3 5.3 6.6 9.6 13.8 19.4Prepaid expenses and other 0.2 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.4 0.6 0.8 1.2Deferred financing costs

Total current assets 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

Non-current assets:Property and equipment, net 0.5 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 1.1 2.1 2.6 3.1Goodwill 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Intangible assets 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6Deferred financing costs 1.0 1.0 0.9 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8Other assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total non-current assets 2.1 2.1 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.5 3.5 4.0 4.5

Total Assets 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 liabilities:Accounts payable and accrued expenses 1.9 2.2 2.0 2.4 2.4 2.8 3.0 3.4 3.7 3.7 5.3 7.7 11.0 15.9Current portion of long-term debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Current deferred revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total current liabilities 1.9 2.2 2.0 2.4 2.4 2.8 3.1 3.4 3.7 3.7 5.3 7.7 11.1 15.9

Non-current liabilitiesLong-term debt 26.3 27.3 28.2 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1 25.1Long-term deferred revenue 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 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

Stockholders' equity:Common Stock 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Additional paid-in capital 72.8 73.0 73.3 78.7 78.7 92.3 92.3 92.3 108.3 108.3 133.3 133.3 133.3 133.3Accumulated deficit -76.6 -80.4 -83.6 -90.1 -90.1 -94.3 -98.5 -102.0 -106.4 -106.4 -120.2 -128.7 -127.4 -114.5Total stockholders' equity -3.7 -7.2 -10.2 -11.2 -11.2 -1.8 -6.0 -9.5 2.1 2.1 13.3 4.7 6.1 19.0

Total liabilities and stockholders' equity 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


Tao Levy (212) 938-9948 AxoGen | 24

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

1Q14 2Q14 3Q14 4Q14 2014 1Q15E 2Q15E 3Q15E 4Q15E 2015E 2016E 2017E 2018E 2019E

Net Income -$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

Adjustments to reconcile net income to net cash used for operating activities:

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

Cash from Operating Activities -$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

Cash from Investing Activities -$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

Cash from Financing Activities $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 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


Tao Levy (212) 938-9948 AxoGen | 25

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 analyst’s (or the analyst’s 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 analyst’s (or the analyst’s 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 analyst’s (or the analyst’s 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 analyst’s coverage universe (or the analyst’s team coverage).* Rating Distribution (as of December 31, 2014)

Investment Banking Relationships (as of December 31, 2014)

Outperform:58% Neutral: 39% Underperform: 3%

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 1,2,5,7 Intersect ENT 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.

http://www.wedbush.com/ResearchDisclosure/DisclosureQ414.pdf

Tao Levy (212) 938-9948 AxoGen | 26

6. WS is acting as financial advisor. 7. WS expects to receive compensation for investment banking services within the next 3 months. 8. WS provided non-investment banking securities-related services within the past 12 months. 9. WS has received compensation for products and services other than investment banking services within the past 12 months. 10. The research analyst, a member of the research analyst’s 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. 11. WS or one of its affiliates beneficially own 1% or more of the common equity securities. 12. The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the company’s 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/equity-research Applicable disclosure information is also available upon request by contacting Ellen Kang in the Research Department at (213) 688-4529, by email to [email protected], 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

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mailto:[email protected]

Tao Levy (212) 938-9948 AxoGen | 27

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.

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RETAIL AND CONSUMER TECHNOLOGY, INTERNET, MEDIA & SOCIAL MEDIA LIFE SCIENCES AND HEALTH CARE

Healthy Lifestyles Communications & Cloud Infrastructure Biotechnology/BiopharmaceuticalsPhil Terpolilli (212) 833-1367 Scott Thompson (212) 938-9933 David M. Nierengarten, Ph.D. (415) 274-6862

Dilip Joseph (415) 273-7308Leisure Communications and Application SoftwareJames Hardiman, CFA CPA (212) 833-1362 Shyam Patil, CFA (213) 688-8062 Heather Behanna, Ph.D. (415) 274-6874Sean Wagner (212) 833-1363 Andy Cheng (213) 688-4548

Emerging PharmaceuticalsRestaurants Enterprise Software Liana Moussatos, Ph.D. (415) 263-6626Nick Setyan (213) 688-4519 Steve Koenig (415) 274-6801Colin Radke (213) 688-6624 Jae Cho (212) 938-9937 Healthcare Services - Managed Care

Sarah James (213) 688-4503Specialty Retail: Hardlines Entertainment: RetailSeth Basham, CFA (212) 938-9954 Michael Pachter (213) 688-4474 Medical DevicesJohn Garrett, CFA (213) 688-4523 Alicia Reese (212) 938-9927 Tao Levy (212) 938-9948

Nick McKay (213) 688-4343Specialty Retail: Softlines Medical Diagnostics and Life Sciences ToolsMorry Brown, CFA (213) 688-4311 Entertainment: Software Zarak Khurshid (415) 274-6823Taryn Kuida (213) 688-4505 Michael Pachter (213) 688-4474

Nick McKay (213) 688-4343RETAIL CHANNEL CHECKING GROUP

Financial TechnologyLupine Skelly (505) 417-5427 Gil B. Luria (213) 688-4501

Aaron Turner (213) 688-4429INDUSTRIAL GROWTH TECHNOLOGY

Internet: Media and GamingEnvironmental Services / Building Products Michael Pachter (213) 688-4474Al Kaschalk (213) 688-4539 Nick McKay (213) 688-4343

Alicia Reese (212) 938-9927Water and Renewable Energy SolutionsDavid Rose, CFA (213) 688-4319 Internet: Social Media, Advertising & TechnologyJames Kim (213) 688-4380 Shyam Patil, CFA (213) 688-8062

Andy Cheng (213) 688-4548

MediaJames Dix, CFA (213) 688-4315

Movies and EntertainmentMichael Pachter (213) 688-4474Alicia Reese (212) 938-9927Nick McKay (213) 688-4343

SemiconductorsBetsy Van Hees (415) 274-6869Ryan Jue, CFA (415) 263-6669

MANAGER, RESEARCH OPERATIONSEllen Kang (213) 688-4529

EQUITY RESEARCH DEPARTMENT(213) 688-4529

DIRECTOR OF RESEARCHMark D. Benson (213) 688-4435

AxoGen

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