MiMedx Group, Inc. (NASDAQ:MDXG) Q3 2023 Earnings Call Transcript

MiMedx Group, Inc. (NASDAQ:MDXG) Q3 2023 Earnings Call Transcript October 30, 2023

MiMedx Group, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.04.

Operator: Good afternoon, and thank you for standing by. Welcome to the MiMedx Third Quarter ‘23 Operating and Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Notarianni, Head of Investor Relations for MiMedx. Thank you. You may begin.

Matt Notarianni: Thank you, operator, and good afternoon, everyone. Welcome to the MiMedx third quarter 2023 operating and financial results conference call. With me on today’s call are Chief Executive Officer, Joe Capper; and Chief Financial Officer, Doug Rice. As part of today’s webcast, we are simultaneously displaying slides that you can follow. You can access the slides from our Investor Relations website at mimedx.com. Joe will kick us off with some opening remarks, and Doug will provide a summary of our operating highlights and financial results for the quarter, and then Joe will conclude with some additional updates, including a discussion of our financial goals. We will then be available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements, including statements regarding future sales growth, EBITDA, free cash flow and cash balance costs, future margin and expenses and expected market sizes for our products.

A medical scientist holding up a test tube, illustrating biopharmaceutical research.

These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual results and market sizes will depend on a number of factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays, and other factors. Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our annual report on Form 10-K, and our quarterly reports on Form 10-Q. Also, our comments today include non-GAAP financial measures, which we provide a reconciliation to GAAP measures in our press release, which is available on our website at mimedx.com. With that, I’m now pleased to turn the call over to, Joe Capper.

Joe?

Joseph H. Capper: Thanks, Matt, and good afternoon, everyone. Thank you all for joining us on today’s call. It is my pleasure to report on another excellent quarter. As you will hear today, the Company is executing across the board commercially, operationally and financially. In addition to delivering outstanding results for the period, we continued to improve the operational effectiveness of the Company and prepared for the launch of another new product. I will detail these positive developments one-by-one, starting with our strong financial performance. Q3 marked the third consecutive quarter, during which we grew revenue by plus 20%. This type of consistent sales performance with above market growth rates is a testament in the team’s stellar execution and our sound strategic plan.

We’ve also been clear in our messaging that expect to generate greater profitability as the business close. In fact, on our last call, we’ve guided to an adjusted EBITDA margin of above 20% for the second half of 2023, demonstrating excellent leverage as the business scales. We are happy to report that we did indeed achieve this objective in Q3. We have a powerful combination of highly talented individuals, innovative solutions that help people heal and industry leading sales and operations infrastructure. Our multifaceted approach in the Wound & Surgical Markets is generating the impressive results we were targeting when we repositioned the business this past summer. As importantly, the organization is well-situated to continue our momentum and significant growth for the foreseeable future.

More on our long-term growth plan in a minute. First, I’d like to touch on some of the noteworthy accomplishments from the quarter. Q3 year-over-year net sales grew by approximately 21% to $81.7 million, another outstanding growth quarter. Gross profit margin was 82% and would have been even higher, but for contractually committed last time by some lower margin product. Adjusted EBITDA was $17.6 million or 21.6% of sales, up from an adjusted EBITDA of $2.4 million in Q3 of last year, represented a year-over-year increase of over $15 million. We ended the quarter with $81.2 million in cash, up $12.5 million in the quarter. We announced the collaboration with MediWound, a global leader in wound care, which plans to use our EPIFIX product during the wound healing phase of its EscharEx Phase III Study in venous leg ulcers.

And we recently announced the launch of EPIEFFECT, a new product designed to meet the expanded needs of customers in the private office segment. I’d also point out that our efforts to streamline operations and build on our leadership position in the Wound & Surgical Markets are working as designed, and have helped dramatically improve our financial profile over the last few quarters. As you will recall, this was the course we charted when I arrived nine months ago. My intent has been to create value by focusing our commercial efforts and unlocking leverage in the business as we grow. We are clearly on the right track as evidenced by the nearly 22% adjusted EBITDA margin in the third quarter. Moving now to the Company’s progress on our three primary growth drivers.

As a reminder, these are the areas in which we are concentrating our time and resources in order to best position the Company for long-term success. Our highest priority is to continue to build on our leadership position in the Wound & Surgical Markets by enhancing our product portfolio and expanding geographically. For the third quarter, this focus again produced growth in all sites of service. Sales grew by about 18% over the prior year quarter in the hospital sector, which continues to benefit from our two new product introductions late last year. We continue to invest in clinical research and are looking to expand our medical affairs efforts. Investments which are critical to support our growth in general and more specifically in the surgical suite which is certainly a focus for the customer.

In the private office segment, we grew sales by 17%. While still a healthy cliff, this growth rate slowed a bit sequentially, likely driven by the massive amount of confusion created by the ill-fated attempt to introduce new Local Coverage Determinations or LCDs for skin substitutes by three of the Medicare Administrative Contractors or MACs. The proposed LCDs which cover 15 states were scheduled to go in effect on October 1st and would have set an arbitrary cap of four outlets for application per patient, potentially reducing levels of care. The LCDs also had dramatically restricted the number of products and companies eligible for reimbursement. Ultimately, the plan was abandoned, but not before creating much confusion. We believe this uncertainty impacted ordering behavior during the quarter, as providers grapple with how they might have to modify care protocols.

Our position on this subject has been clear. We will continue to advocate in favor of changes that would level the playing field by eliminating the opportunity to gain a reimbursement system while ensuring access to products like ours that have proven to be highly effective. That said, we recently strengthened our offering in the private office setting. The newest addition to our Advanced Wound Care solutions product portfolio EPIEFFECT was recently added to the Medicare ASP list, clearing the way for its full commercial launch now underway. EPIEFFECT offers a thick, tri-level configuration of amnion/chorion and intermediate layers with handling characteristics and product attributes that may get a preferred treatment option for deep tunneling wounds or cases or securing the graft in place with sutures is desired.

We are excited to highlight this product with so many of our customers at SAWC later this week. We remain committed to organic product development and innovation of our market leading placental-derived technology as we see this as an essential element of future growth. Speaking of best-in-class products, as I mentioned, we’re pleased to be supporting MediWound, which has chosen to use our EPIEFFECT or EPIFIX product in its Phase III trial for EscharEx, its next generation agreement product now in development. According to MediWound, by incorporating market leading and extensively studied EPIFIX into its trial, it aims to maintain consistency among study subjects and optimize the potential for complete healing throughout the study duration. It’s rewarding to receive such a high quality third party validation of our technology.

Finally, we remain encouraged by the strides we continue to make in developing the Japanese market. Those that are familiar with launching new products in Japan know there is typically a longer lead time to realize the potential of a product than in other geographies. However, given the large market opportunity, it is well worth the time and effort. We are encouraged by the early strides we are making and remain optimistic about the future of this business. Our next priority is to develop opportunities in adjacent markets to create additional growth drivers for the Company. As I stated on previous calls, we are evaluating ways to expand our skin substitute portfolio, beyond amniotic tissue, to include xenografts and or synthetics. Notwithstanding the superior qualities of our placental-derived allograft, this is a market driven strategy, which will open up segments of the market where it is difficult, if not impossible for us to compete today.

We believe this approach will be highly complementary to our current business, allowing us to leverage our entire commercial infrastructure. On the surface, this seems like an area where an inorganic effort could make sense. And given our much improved financial profile, I know many of you are excited to see us move in that direction. As applicable opportunities arise we will give them careful consideration. To be clear, any potential inorganic target would have to first and foremost be an excellent cultural and strategic fit, which would accelerate our growth plan. It would also have to have a clear pathway for becoming accretive. And finally, our last objective is to build a corporate discipline around expense management, rationalization and continuous process improvement.

While we continue to exceed the goals put in place to measure our progress in the failure this objective is really more about building a culture that is focused on getting the best return from our limited resources. It has been my experience that institutionalizing this mindset early on will pay dividends in terms of gaining operating expense leverage as the business scales. During the quarter, we made excellent progress executing against these three strategic objectives. Our results demonstrate that our approach is having the desired effects. We will continue to identify and execute against most relevant growth drivers for our business, as we see sustained long-term performance as a best way to create tremendous value. Before I turn the call over to Doug, I’d like to provide a few comments on the Series B Preferred Stock repurchase we executed this past Friday.

First, I would like to thank Hayfin for their past and continued support of the Company. We could not ask for a better partner. As our stock started to show signs of meeting the mandatory conversion criteria, we began conversations with Hayfin about how we might help them manage an orderly transition. Ultimately, this resulted in us buying back half of their position at $6.13 per effectively converted common share for a total of $9.5 million. A stock repurchase at this point in the Company’s evolution would not typically be my highest priority for use of capital. However, this was opportunistic and made good sense since it stopped the 6% preferred dividend on the shares repurchased and was executed at a discount for the convert price of $7.70.

Given the rate at which we are building cash, and our much improved borrowing capacity, we do not see this as in any way impairing our ability to capitalize on strategic opportunities that may arise. Now, let me turn the call over to Doug, for more detail on our financial results. Doug?

Doug Rice: Thank you, Joe. Good afternoon, everyone, and thanks for joining us today. I’m pleased to once again be presenting these strong quarterly results to you all today. Before diving in, I wanted to note that many of the financial measures covered in today’s call are on a non-GAAP basis. So please refer to today’s earnings release for further information regarding our non-GAAP reconciliations and disclosures. First, as Joe mentioned, our third quarter 2023 was the third consecutive quarter in which our net sales growth exceeded 20% year-over-year, despite having one fewer shipping day than the prior year period. Third quarter net sales of $81.7 million also represented modest sequential growth compared to the second quarter of 2023, which is all the more impressive given the traditional Q3 dip in healthcare seasonality as well as the broad based strengthen we have seen across all of our sites and service during the first half of the year.

The commercial team has once again executed across all of sites and services with strong double-digit growth in each segment, despite some of the confusion Joe mentioned related to the on and off reimbursement changes during the quarter. Moving to gross profit and gross margin. Our third quarter gross profit was about $67 million an $11 million improvement compared to $56 million last year and our gross margin was roughly flat on a year-over-year basis at around 82%. In the third quarter, our quality operations and regulatory team continue to make progress on its yield improvement plans, which we expect will benefit us moving forward. These efforts include the introduction of certain automation enhancements that are designed to help us realize additional scale as we grow.

As Joe mentioned, gross margin was negatively impacted in the quarter by a contractual last time buy for a non-core market white label product that we were manufacturing for a third party. This line was essentially being sold at cost, so we expect this pressure on our gross margin to subside moving forward. With that said, we remain focused on continuing to leverage our growing scale and driving our gross margin percentage back into the mid 80s over the long-term. GAAP selling, general, and administrative expenses or SG&A was $52.6 million or 63% of net sales, compared to $53.5 million or 79% of net sales in the prior year period. The decrease in SG&A both on a dollar and relative basis was a result of our ongoing expense management, which more than offset by higher commissions we paid in the quarter due to our higher sales.

Our GAAP R&D expenses were $3.2 million, a $2.8 million decrease compared to $6 million in the prior year period. This year-over-year decline in R&D spend was principally driven by the strategic realignment we announced in June of this year, and the associated wind down of the regenerative medicine business unit and its R&D activities. Moving forward, we anticipate our R&D spend to generally be in the range of 3% to 4% of sales which we believe will provide sufficient support in developing our Wound & Surgical product pipeline. I’m also pleased to report that our investigation, restatement and related expenses were immaterial for the third quarter of 2023, as we have been able to finalize many of the matters over the last few months. We anticipate spending on these expense lines will be immaterial moving forward.

GAAP net income was $8.5 million compared to a net loss of $8.4 million in the prior year period. I share in Joe’s excitement to be able to report this year-over-year improvement as a clear sign of the meaning progress the organization has made over the last 12 months. Adjusted EBITDA was $17.6 million or 21.6% of net sales compared to an adjusted EBITDA of $2.4 million or about 3.5% of net sales in the prior year period. As a reminder, in light of our strategic realignment, we anticipate that after this quarter we will no longer bifurcate our business on a segment basis. Turning to our liquidity. The financial results we have posted over the last several quarters have led to strong improvement in our net cash position, as the business begins generating meaningful free cash flow.

At the end of Q3, the Company had $81.2 million of cash reflecting a sequential step up versus June 30 of approximately $12.5 million. With a continued focus on adjusted EBITDA generation, we believe our much improved financial profile will continue to strengthen and provide us opportunities to grow and diversify the business. Additionally, our healthy cash flow allows us to be opportunistic in improving our balance sheet as was the case with the transaction, Joe mentioned earlier regarding the $9.5 million repurchase of a portion of Hayfin Series B preferred shares. We are particularly pleased to be able to execute this transaction utilizing less than this quarter’s worth of operating cash flow generated, continuing to provide us with other options for growth funding in the future.

I will now turn the call back to, Joe. Joe?

Joseph H. Capper: Thanks, Doug. As you have just heard, we had another outstanding quarter, once again exceeding expectations. Quarterly revenue was up 21% year-over-year. Gross profit margin was 82%. Adjusted EBITDA was $17.6 million. We increased our cash balance to over $81 million, ready EPIEFFECT for launch and continue to realize margin improvement by driving expense rationalization throughout the organization. For the first three quarters of the year, we have delivered consistently improving performance. With Q3 having our highest quarterly sales and an adjusted EBITDA margin of over 20%. As you may recall, after exceeding expectations last quarter, we raised full-year guidance for revenue percentage growth to be in the mid-to-high teens.

Following a similar performance in Q3, we are now again raising full-year revenue percentage growth outlook to be in the high-teens, nearing 20%. As a reminder, sales for the fourth quarter of 2022 were by far our highest quarterly sales of 2022, at $74.4 million, naturally making it our toughest comp for the year. That being said, given the current strength of the business, and with the help of the EPIEFFECT launch, we do expect to close 2023 with another strong performance and ride that momentum into the New Year. As we’ve stated on our last call, we also expect at least a 20% adjusted EBITDA margin for second half 2023 and with the recent Hayfin transaction complete, we now expect to end the year with over $80 million of cash. Additionally all fundamentals continue to point to a double-digit percentage annual revenue growth rate for the foreseeable future.

Those of you who have been following the Company for the past three quarters have witnessed a meaningful business transformation, driven by excellent commercial execution, decisive strategic action to reposition the Company and expense reduction initiatives all resulting in a much improved financial profile for the Company. I fully expect that we will continue to execute our plan, close the year up strong and set the business up or sustain long-term growth. In closing, I would like to thank the entire MiMedx team for their outstanding performance throughout the first three quarters of the year. Your enthusiasm and continued dedication to the Company and to people in need of care have been a source of personal inspiration during my short tenure.

I look forward to working with you as we seek to maximize the potential of this incredible Company and take it to new heights. With that, I’d like to open the call to questions. Operator, we are now ready for our first question. Please proceed.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Chase Knickerbocker with Craig-Hallum Group. Please proceed with your question.

Chase Knickerbocker: Hi, Joe. Hi, Doug. Thanks for the question guys, and congrats on a good quarter. Maybe starting on the physician office segment first. Maybe a little bit of additional color on how kind of customers reacted to that LCD, you know, during the quarter, obviously, still good growth there. Maybe talk as to why you being listed on that LCD would still lead to some pausing. And then in, if we look at kind of what we’ve seen so far in Q4, have we seen kind of normal ordering behavior kind of come back now that LCD has been pulled? Just some additional color there.

Joseph H. Capper: Yes. Chase, thank you. That’s Joe. Yeah, we saw some confusion in ordering patterns in the third quarter in particular, in the regions that were impacted, the 15 states were covered by those three LCDs. And it was — and we could compare that against the other MACs. So there was definitely some confusion and kind of feedback from the field was that docs for to figure out, what they had to do, how they might have to modify care protocols to adhere to the full application restriction. And then there was a lot of noise as to what products would have will go into the coverage and which ones were not. So we saw the impact, good news for us is overall, that site of service continued to grow at a very healthy rate. Second part of your question is what are we seeing, in October so far? It looks like within those three MACs, that order behavior started to revert back to normal.

Chase Knickerbocker: Got it. That’s helpful. And maybe stay in the position office segment. If we look at kind of EPIEFFECT, kind of growth and initial kind of launch here. Do you expect it to, cannibalize some EPICORD and EPIFIX users, or is this going to be more de-novo uptake or maybe some people who are using your products for commercial patients using something else for Medicare patients. How should we think about the customer set for EPIEFFECT earlier?

Joseph H. Capper: I think earlier, I’m thinking about it primarily in the private office setting and it will be used in applications that is not being used in today or used for a procedure just not being used in today. So it should expand the market a bit, and then there will be some cannibal situation of the EPIFIX product.

Chase Knickerbocker: Got it. And then just last for me. I think it’s fair to say that your stock may have gotten caught up in, the recent GLP-1 craze we’ve seen in the markets lately. Maybe just some general kind of high level thoughts there from you guys, any sort of impact that you expect from proliferation of these drugs, in the mid-to-long-term in the markets that you compete in?

Joseph H. Capper: Yeah. Chase, yes, I think you’re right. The word in the property is a bit of a craze in the marketplace. So here’s my thought on it. I worked for three different companies that had some business in the diabetes space. And I would tell you that so I’ve been in that space, I was in that space for almost 20 years. And I can’t remember back 15, 20 years ago when we were appalled at the increase in the rate of diabetes in the United States when it surpassed 8%. And since that time, there has been numerous drugs, products like continuous glucose sensors, automated insulin delivery systems, all kinds of education to help drive down against this supply of diabetes in this country, a lot of diabetic, a lot of diet products.

And unfortunately, the epidemic continues to expand in the U.S. So I don’t know that it’s a product that’s going to cure the problem. By all indications, everything that I could tell, these GLP-1 drugs do work. People are losing weight with them, which is wonderful if at some point in the future, these would expand with minimal adverse effects and it had some potential impact on the rate of diabetes, that would be wonderful. Do I think it’s going to happen? I would say that historical evidence would suggest otherwise. So I think it’s great. I think, the more people can use these drugs it has a weight loss impact. Wonderful, so I think it’s going to translate into a decrease in the rate of diabetes the United States. I think that is a bridge too far.

Evidence would suggest otherwise. But even if it did, let’s talk for a second about potential impact on diabetic foot ulcer DFUs like ulcer indications for use of our product. The evidence would suggest that there is not a strong correlation between obesity and lower extremity ulcers. In fact, I think you cited this in your very thoughtful initiation that you published last week. The evidence would suggest the opposite. If in fact, DFUs are often associated with people, have low BMI, but are just generally unhealthy smokers, hypertension, poor diet, etcetera, etcetera. I just don’t think that’s, that behavior is going to change much, because we’ve lost a new drug. And, I think Ozempic has been out since 2016. And that was, you know, the one of the first GLP drug in this category.

At the time it was launched, the incidence of diabetes was somewhere around 9.1%. Two or three years after it’s launched, the incidence of diabetes in the U.S. was at 11.3%. That was the number that was published pre-COVID. I can’t imagine that COVID did anything positive for that number. So, maybe it will at some point have an impact on the incidence of diabetes in the U.S., but it certainly is not doing so right now. So, I just don’t see the correlation at this point.

Chase Knickerbocker: Got it. Thanks for those thoughts and thanks for the questions, guys.

Joseph H. Capper: Thanks, Chase.

Operator: Thank you. Our next question comes from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.

Anthony Petrone: Hi, thanks, and good afternoon. Congrats on a strong quarter here set up into 2024. Maybe I’ll pivot back to the LCD, Joe, if I can for a moment. I’m just wondering when you look at sort of the verbiage in late September, there was references to just — the implementation timeframe that there wasn’t enough time to sort of transition practices over and that potentially could impact patient care. But, you also saw just a certain amount of advocacy from the various different medical societies out there in favor of sort of taking a second look here. So maybe just a little bit behind the scenes. What do you think was the tipping point on putting the brakes here? And as we look at the new sort of just common periods, I mean, what are the next big updates here that we should be thinking about from these you know, local MACs and as well as other MACs that potentially may look to change their policies heading into 2024 and 2025.