MiMedx Group, Inc. (NASDAQ:MDXG) Q4 2022 Earnings Call Transcript

MiMedx Group, Inc. (NASDAQ:MDXG) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good afternoon, and thank you for standing by. Welcome to the MiMedx Fourth Quarter and Full Year 2022 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, Shomali, and good afternoon, everyone. Welcome to the MiMedx fourth quarter and full year 2022 operating and financial results conference call. With me on today’s call are Chief Executive Officer, Joe Capper; and Chief Financial Officer, Pete Carlson. As part of today’s webcast, we are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations website at mimedx.com. Joe will kick us off with some opening remarks and Pete will provide a summary of our operating highlights and financial results for the quarter, and then Joe will conclude with some additional updates, including the 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, future margin, expected market sizes for our products and potential time lines for clinical trials and FDA submissions and reviews. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual results, market sizes, timing and FDA review will depend on a number of factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays, the results of our clinical trials, our interpretation of those results 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 and we provide a reconciliation to GAAP measures in our press release, which is available on our website at www.MiMedx.com. With that, I’m now pleased to turn the call over to Joe Capper. Joe?

Joe Capper: Thanks, Matt. Good afternoon, everyone. As you know, I joined MiMedx on January 30th. I spent the first month doing exactly what you would expect, meeting members of the team, learning more about our technology, product offering, and associated opportunities, speaking with some of you in the investor community, and immediately taking a deep dive into the various parts of our business. While it’s only been a month, I’m pleased to report that the Company has far surpassed the expectations I had walking in the front door. I knew MiMedx was a company with great potential or I would not have taken the job. What I’ve been learning in these early days is that the upside is significantly greater than I initially appreciated.

Today, I will outline the approach I believe will unlock the vast potential I see at MiMedx. In prior leadership roles, my approach in maximizing the Company’s potential has always been to streamline operations and add businesses or products that strategically benefit the growth profile. I see no reason why we can’t do this with MiMedx. The Company is both financially and operationally strong and is poised to benefit from disciplined execution around a tight strategic plan. As we begin this journey, I want to state unequivocally that as a medtech tissue-based company, we have the foundation in place today to accomplish great things and create tremendous value. I know there is also considerable excitement about our clinical efforts in knee osteoarthritis.

However, my near-term focus is to build a world-class wound care business that generates substantial EBITDA well before the knee OA program is commercially available in the U.S. To that end, we finished 2022 with a solid Q4, generating over 10% year-over-year net sales growth and an improving adjusted EBITDA. In fact, our fourth quarter net sales were our highest since the end of 2019. This strong finish of €˜22 has given us excellent momentum entering the New Year. I believe, with what we already have in place, the business can deliver consistent top line revenue growth for the foreseeable future. Not surprisingly, I’ve been asked several times what it was about MiMedx that attracted me to the opportunity, so I thought I would start by addressing that question, then will we will dive into specifics about the business and our direction moving forward.

While there were many positive aspects about this company, I will highlight the three that are most compelling for me. The first was the Company’s best-in-class technology. MiMedx is a pioneer in the field of placental biologics with an unmatched product portfolio, and makes a positive difference in the lives of an increasing number of people. Second was the quality of people I met prior to joining the Company. And as I’ve gotten to know many of my new colleagues over the past few weeks, it is abundantly clear that we have a team of very knowledgeable and experienced people at every level of this organization. They understand the business and or as eager as I am to succeed. I am proud to be . And finally, it was important to me that the business was stable with significant opportunities for growth.

MiMedx has a large growing revenue base, with opportunities to streamline operations and improve profitability. Some of that work in fact is already underway. Moreover, I believe this company has the ability to make opportunistic acquisitions or licensing deals that will enhance our growth profile. Let me shift gears to talk about the future and how we are focusing the efforts of the organization. Our success will be determined by how well we execute on three basic growth objectives. All company activity will stem from one of these three areas, with resources being allocated accordingly. Our first growth objective is to build on our leadership position in the Wound & Surgical markets by enhancing our product portfolio, while concurrently expanding geographically.

We operate a highly profitable business approaching $300 million of revenue, which we are confident we can grow annually at double-digits with the proper focus. As such, the majority of our resources and focus will be invested in our Wound & Surgical business. We must execute well in this core business in order for MiMedx to be successful. On our last call, the Company reported on progress we have been making in these areas. Specifically in September, we introduced two new products to the U.S. market. As Pete will highlight, our fourth quarter results make evident that we are off to a fast start with these new products. During these early months of the launch, we have seen widespread market acceptance and we are exceeding our initial expectations.

Photo by National Cancer Institute on Unsplash

Additions like these to our already market leading product portfolio will serve to strengthen our brand customer relationships and expand the use cases for our products into more areas where chronic and acute wounds are treated. We have also reported on the work being done in Japan in an effort to establish a presence in select markets outside of the U.S. While the requirements to get up and running in Japan have been a bit arduous, we have been making steady progress. We now have clearance and reimbursement for our product and several hundred physicians have recently been trained on its use. I’m also pleased to say that we have started generating initial sales with our partner, Gunze Medical. Our second growth objective is to develop opportunities in adjacent markets in addition to our development of a knee OA product.

By way of update, after active engagement with the FDA over the last several months, we are pleased to announce that our registrational knee OA study is now underway. This is the result of a tremendous amount of work on the part of our Regenerative Medicine team and our partner CRO, Nordic. Thank you to all of those in the organization who got us to this exciting milestone. As a reminder, this is the first of two studies that will be needed in order for us to file our BLA. In this trial, we expect enrollment of approximately 470 patients with three arms, a six-month observation period and six additional months of monitoring. We are pleased to be underway and look forward to reporting on our progress as appropriate. While the knee OA project is our largest investment for the possible entry into a new market, it is also our intent to look for additional opportunities in areas that are complementary to our Wound & Surgical portfolio, both organically and inorganically.

Last year’s licensing of the Turn Therapeutics IP has stayed being a prime example. And finally, our third objective will be to build a corporate discipline around expense control, rationalization and continuous process improvement in order to ensure our growth becomes more profitable over time. On our last call, my predecessor Todd detailed his objectives to drive operating leverage. Specifically, the Company has goals to improve the Wound & Surgical segment contribution margin to at least 30% of segment net sales, and to get corporate expenses as a percentage of sales to below 20%. An important step in this process was to augment the team with the experience and leadership Ricci Whitlow brings as our new Chief Operating Officer. Ricci has an extensive background in the human tissue space and in her relatively short time here is already establishing disciplines within our operations team that will improve production yields and help transform the way we bring products to market.

I’ve had success creating value at prior companies by establishing a process of consistently identifying growth drivers for the business, then executing on those that are the most strategically relevant. That is exactly what we will do at MiMedx. If we stay focused and execute well in these three areas of the business, I believe we will continue to build on this franchise, have the opportunity to create tremendous value, and once again, establish MiMedx as not only the leader in our space, but one of the most highly regarded healthcare companies in the market. I look forward to reporting on our progress in each of these areas. Hopefully, this gives you a sense of what drew me to my medics, and hopefully you too share my excitement for the future.

Now, let me turn the call over to Pete, who will recap our fourth quarter and full year results. Pete?

Pete Carlson: Thank you, Joe, and good afternoon, everyone. As a reminder, unless otherwise specified, all results referenced in my prepared remarks are on a fourth quarter 2022 versus fourth quarter 2021 comparison basis. We ended 2022 with strong commercial and operational momentum and reported our highest level of quarterly net sales since the fourth quarter of 2019. On an adjusted net sales basis, our fourth quarter results represent the highest level we have seen since 2018. We are proud of these results and expect our momentum to continue going into 2023. For the fourth quarter, we reported $74.4 million in net sales compared to the $67.4 million. As you know, virtually all our net sales come from our Wound & Surgical segment, which delivered $73.6 million, reflecting growth of 10.6%.

This strong performance is a testament to the dedication of our commercial team and our leading product offering, including our recently launched products. Further, this result is despite the continued unfavorable competitive environment in the private physician office setting. The quarter reflects strength across our Wound & Surgical end markets, and the team remains focused on bringing more new products to the market in support of future top line growth, both organically and otherwise. Gross profit was $60 million compared to $56.7 million. Gross margin in 4Q was 80.7% compared to 84%. This margin level reflects production variances, primarily from lower production levels and is below our expectations going forward. We have several initiatives underway focused on improving our gross margins in Wound & Surgical.

Selling, general and administrative expenses or SG&A were $50 million compared to $53.1 million. The current quarter included increased commissions on higher sales and the impact of severance associated with restructuring activities. These were more than offset by lower compensation, principally due to year-end incentive adjustments, and also reflect the impact of cost reductions taken during the quarter. As we previously noted, headcount reductions late last year are expected to reduce SG&A costs by more than $5 million on an annual basis. Our research and development expenses were $5.4 million compared to $4.6 million. We saw increased R&D expense in both of our segments. The higher spend came primarily in Regenerative Medicine related to preparation activities for our knee osteoarthritis clinical trial, which is now underway.

Investigation, restatement and related results were an expense of $3.4 million compared to a benefit of $4.5 million. The prior year quarter included recoveries from our Directors and Officers insurance program. Net loss was $400,000 compared to net income of $2.2 million. Adjusted EBITDA was $7.3 million or 9.8% of net sales compared to $3.6 million or 5.4% of net sales. I want to now briefly discuss results for the full year, and will remind you that 2021 included sales of products impacted by the end of the FDA’s period of enforcement discretion on May 31, 2021, impacting not only net sales but also our profitability metrics. Net sales for the full year 2022 were $267.8 million compared to $258.6 million in 2021, an increase of 3.6%. Excluding products impacted by the end of enforcement discretion, 2022 net sales growth was 10.5% compared to the $240 million in 2021.

You could also see this growth in our Wound & Surgical segment, which had net sales growth of 10.9% for the full year 2022. Gross margin was 82% for the full year 2022, compared to 83.3% in 2021, again, reflecting the impact of production variances. We had R&D expenses of $22.8 million in the full year 2022 compared to $17.3 million in 2021 as we increased our efforts on new product development and on our knee osteoarthritis program. SG&A for the year 2022 was $208.8 million compared to $198.4 million in 2021. Net loss for the year ended December 31, 2022 was $30.2 million compared to a loss of $10.3 million in 2021. Investigation, restatement and related expenses totaled $12.2 million in 2022 compared to $3.8 million in 2021, which included recoveries from our D&O program.

Finally, adjusted EBITDA in full year 2022 was $3.9 million compared to $18.7 million in 2021. On a segment basis in 2022, Wound & Surgical had a segment contribution of $66.7 million or 25.2% of segment net sales and Regenerative Medicine had a segment loss of $15 million. Additionally, SG&A expenses in Corporate and Other were $62.9 million or 23.5% of net sales. As of December 31, 2022, the Company had $66 million of cash and cash equivalents compared to $73.2 million as of September 30, 2022, and to $87.1 million as of December 31, 2021. The sequential decline in our cash and cash equivalents was driven primarily by changes in working capital, including the annual payment of certain insurance premiums, along with the cash consideration associated with the Turn Therapeutics agreement we announced in December.

Based upon our current position and expectations for the business, I want to reemphasize that we remain well-capitalized and do not foresee the need for external financing. Looking ahead, our goal is to deliver low-double-digit percentage growth in net sales. While we have seen solid demand for our products in the hospital outpatient, hospital inpatient and wound care clinic settings, the challenges associated with the reimbursement environment in the private physician office side of service have weighed on our business and we expect this to continue during 2023. Joe will touch on the latest developments as we see them in this segment of the market. From a profitability perspective, as you heard us say on our third quarter call in November and as Joe indicated earlier, we are focused on our goals and of improving our Wound & Surgical segment contribution margin to at least 30% of segment net sales, and reducing our corporate overhead, so that the corporate and other SG&A expense as a percentage of sales is below 20%.

In summary, our fourth quarter financial results were strong, led by commercial execution driving our top-line results and we are making progress to position the Company for sustainable profitability. I will now turn the call back to Joe. Joe?

Joe Capper: Thanks Pete. As you have just heard, we finished the year with a strong fourth quarter, during which we reported quarterly revenue growth of over 10%, continued to roll out our two new products in the U.S. and set the Company on a course to drive greater efficiency and expense rationalization. Already in 2023, we have got our business up and running in Japan and an experienced leadership of our operations and initiated our registrational knee OA study. Before I open the call for questions, I wanted to comment on one additional item, reimbursement in the private physician office setting. As Pete mentioned, our business continues to face headwinds in this segment given the current reimbursement environment, which has created very lopsided competitive landscape.

Specifically, it appears some participants are using what I would describe as a loophole in the current system to provide sizable financial incentives to physicians who use their products, at the expense of the Medicare trust fund. Using financial incentives for physicians to differentiate a sale is expressly prohibited by Medicare regs. It goes without saying, we do not engage in such practices. And as you can see on slide 16, all of our products are on the ASP list. Products that have historically not been on the ASP list are the ones being used to create financial incentives to physicians. Those of us who have been around healthcare for long enough know that eventually CMS closes these loopholes. To that end, we have been actively engaged with the agency highlighting this untoward behavior and offering our perspective and recommendations throughout this process.

In mid January, we participated in a CMS hosted town hall meeting on the topic and provided subsequent written comments. We will keep you updated as we learn more. So, in summary, it is abundantly clear to me that MiMedx is an outstanding business with an incredible line of products that make a positive difference in the lives of thousands of people every day. We have a highly skilled team that is extremely passionate about delivering these life-changing solutions. We have a revenue base that is growing at a healthy clip, approaching $300 million with margin improvement efforts underway, and we have a product pipeline rich with opportunity. Given the solid foundation I have to work with, I am truly excited to be at MiMedx and enthusiastically embrace this opportunity.

I look forward to working with the entire MiMedx team. I can tell, they genuinely share my belief and excitement about our path forward. I’d also like to thank Todd Newton who did all you could ask during his time as Interim CEO. As a result of Todd’s efforts, I joined the company with positive momentum and a bright future ahead. With that, I would like to open the call to questions. Operator, we are now ready for our first question.

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Q&A Session

Operator: Thank you. And our first question comes from the line of Anthony Petrone with Mizuho Group.

Anthony Petrone: Thanks, and good afternoon. And again, Joe, congratulations on your appointment and congratulations on the team on a new start here to the year. Maybe Joe, just to kick off, you mentioned some high level comments several weeks into the CEO role. Maybe just as you think of the broader strategy, staying focused on wound care for one, and then building out the surgical applications portfolio for two, how the priorities may or may not shift on those two and market channel specifically? And then maybe your renewed — your fresh look on development. Obviously, we have the knee OA initiative but how do you sort of view deeper pipeline initiatives for MiMedx? And then, I have a couple of follow-ups. Thanks.

Joe Capper : Yes. So Anthony, thanks for questions. I think, let me back up a little bit. My approach initially with the Company is to more formalize the strategic planning process and cycle, put more structure around it. And as we do that, ideas will flourish from that or stem from that, and then we’ll start to build out a CorpDev kind of pipeline, both internally and externally. I think you hit the nail on the head with the wound care and surgical business that offers the kind of financial profile that this business does and the growth potential, that warrants a lot of focus and that’s what pays the bills. But I think there’s tremendous opportunity there. So my initial thoughts is that’s where I will have most of my focus.

And then we’ll look to see if we can eventually migrate from a wound care company to a wound management company and start to offer some other capabilities in and around our product portfolio, both product line extensions, new products, and potential adjacencies. As far as a fresh look at development, I really don’t have anything new to offer today, to be candid. I think we’re closing out my first month here, and it’s been quite a learning curve. I can tell you that everyone I talked to is — both inside this company and outside this company are incredibly passionate about the entire portfolio. These products are just amazing. When you hear things like changed my life, thought I was never getting better, this product is delivered from God. I mean, these are the kind of things that I’m hearing in the first month.

It tells you that we’re really onto something with this company. And I know the Company’s history hasn’t been great, but I think that the team has done a wonderful job both at the executive leadership level and the Board level shepherding us through that. And now the Company is in this great position, has this growing revenue line, amazing margin profile with a lot of room for improvement. So, it’s hard not to get ridiculously excited about the current product portfolio.

Anthony Petrone: No, that’s very helpful. And maybe I’ll — two quick ones, I’ll throw them out there. One will be on the 10% outlook for 2023, and maybe how should we be thinking about EPIFIX in Japan within that context specifically. So maybe just an update on contribution EPIFIX in Japan. And then the last one will be on reimbursement in wound care in the physician office setting. Obviously, there’s some literature out there on LCD proposals. The company has their recommendations. Anything you can add on any new literature from LCD Max, post January? And with that I’ll get back in queue. Thanks.