MiMedx Group, Inc. (NASDAQ:MDXG) Q1 2024 Earnings Call Transcript April 30, 2024
MiMedx Group, Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $0.04. MDXG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and thank you for standing by. Welcome to the MiMedx First Quarter 2024 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 now begin.
Matt Notarianni: Thank you, operator and good afternoon, everyone. Welcome to the MiMedx first quarter 2024 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 the 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. 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, EBITDA, free cash flow and cash balance growth, future margins and expenses, and expected market sizes for our products.
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 report on Form 10-Q, which we plan to file shortly. 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, and good afternoon, everyone. We thank you for joining us on today’s call as we are very pleased to report the results of another outstanding quarter. As we communicated on our last quarterly call, we expected the momentum we generated in 2023 to continue into the first quarter of this year and that’s exactly what happened. In fact, as you will hear, the business performed even stronger than we expected in Q1, with revenue climbing at a rate of 18% year-over-year. On our yearend call a few months ago, we stressed the importance of the transformative steps we had taken in 2023 to establish a strong foundation from which we could build upon. That seems to be exactly what is happening. As a result of our leadership team’s solid execution on our key initiatives, coupled with the debt refinancing completed in January, we are now operating with a much improved balance sheet and profitability profile.
This provides far greater flexibility as we seek to establish additional growth drivers and strengthen our market position, while remaining highly focused on being a growth oriented and profitable med tech business. Given our success improving the financial profile of the company in a relatively short period of time, I am confident we have the right strategy to create substantial value in the business, even in the face of the typical regulatory and reimbursement uncertainty any health care business encounters. As an industry leader, we will continue to endeavor to shape conversations in these areas. Rest assured, we are working proactively with the help of outside advisers to do just that. Later in the call, we will provide our initial thoughts on the proposed local coverage determination that were published late last week and why we think this is ultimately a positive development for MiMedx in the coming quarters and beyond.
But first, we need to take a few minutes to discuss our outstanding first quarter results and update you on the progress we made regarding our strategic initiatives. For the first quarter, net sales grew year-over-year by approximately $13 million, or 18%, to $85 million, marking another outstanding growth quarter. Gross profit margin improved to 85% in the quarter. Adjusted EBITDA was $19 million, or 22% of sales in the first quarter, representing an increase of $9.5 million over the prior year quarter. We acquired certain assets from TELA Bio and established a distribution agreement with Regenity, paving the way for the introduction of our first xenograft product. As previously announced, we refinanced our debt facility under more competitive terms in January, dramatically improving our financial profile.
We ended the quarter with $48 million in cash after using $30 million to pay down our revolving line of credit and $5 million to complete the TELA Bio Regenity transaction, in addition to other Q1 cash obligations. And finally, we were pleased to be able to add two new directors during the quarter with the appointments of Tiffany Olson and Dorothy Puhy, two highly accomplished individuals whose deep medtech expertise will make them valuable assets to the board moving forward. Additionally, as we disclosed in our proxy filing last week, Dr. Phyllis Gardner and Dr. Michael Giuliani not be standing for re-election at our upcoming Annual Meeting. Phyllis and Michael played pivotal roles in shaping the direction of the company during particularly challenging times, and we are incredibly thankful for their contributions over the last several years.
Turning now to our strategic focus; on our last four quarterly calls, I provided updates on our progress, executing on the following three primary growth drivers, which we laid out at the beginning of 2023. One, continuing to build on our leadership position in the wound and surgical markets by enhancing our product portfolio and expanding geographically. Two, developing opportunities in adjacent markets to create additional growth drivers and three, building a discipline around expense management, rationalization and continuous process improvement. I am incredibly pleased with the progress the team continues to make in these areas, which has fuelled our success. Given the evolution of the business, we have refined our plan for 2024 and will provide updates around the following growth initiatives.
First, we will continue to innovate and diversify our product portfolio to maximize growth. It has become — has become increasingly clear that all of the sectors we serve within the wound and surgical markets are benefiting from the products we brought to market. Over the last 18 months, we have introduced three new allografts, two geared toward the surgical market AMNIOEFFECT and AXIOFILL, and one for the private office, EPIEFFECT, the launch of which continues to exceed our expectations. All three products have been met with widespread market acceptance, and we have received exceptional feedback on the clinical benefits being derived from each. In fact, during the first quarter we once again grew in all sites of service, due in large part to the success we are experiencing with these products.
And of course, we continue to have success developing our EPIFIX business in Japan, where our sales grew by 146% in Q1, albeit off of a low base. We remain confident that this market will continue to develop into a meaningful contributor over time. This leaves me with two overriding themes to expect from us going forward. Number one, we need to continue to innovate products designed to meet emerging customer needs. This is a proven competitive advantage we must leverage. As we have experienced, our customer base will readily adopt the product when it hits the mark. Number two, the organization has a strong core competency at introducing new products into the various market segments. With this in mind, we hope to introduce as many as three more products over the next 18 months, one of which will be our first xenograft product.
This is a good segue to our second area of focus, which is to develop and deploy programs intended to expand our footprint in the surgical market. One of the rationales for suspending our knee OA program last summer, was to redirect resources to better capitalize on opportunities in various surgical settings. There are tens of millions of surgeries performed in the US every year, many of which could benefit from the use of our products. While increasing our surgical presence has been of strategic importance, this year we are ramping up our clinical and marketing investments and refining this focus in select surgical settings where evidence is mounting as to the efficacy of our products. We added and will continue to add resources to our medical liaison group to improve our support in target areas.
We are partnering with key opinion leaders to publish on outcomes in markets like neurosurgery for Craniectomies, dermatology for nose surgeries, and colorectal and anastomosis. We are excited to fund these activities with the firm belief that the future for growing our footprint across a variety of surgical procedures remains bright, particularly as the body of real world evidence for a wide range of applications continues to grow. And of course, with the upcoming launch of our first xenograft product, we will soon offer a more enhanced portfolio of solutions for such products may be more appropriate for various reasons. As a reminder, this is a 510(k) cleared bovine derived collagen matrix particulate that is indicated for the management of moderately to heavily exuding wounds and to control minor bleeding.
We expect to be ready for a soft launch of this product in the third quarter with full market release later this year. Our third initiative is to introduce programs designed to enhance customer intimacy. You might wonder why this is of such importance that it rises to the level of one of our three most important strategic initiatives. The answer is simple. We want to lower our customer churn. In our markets, customer turnover is high relative to other industries, which impacts margins. We believe we have an opportunity to change this and build a much stickier association to an expanded customer centric offering, thereby increasing the lifetime value of each customer. This will not be easy, especially when dealing with non-contracted, price sensitive markets.
However, we plan to implement a series of interconnected initiatives designed to improve customer intimacy, embedding it into the DNA of the organization. To that end, during the first quarter, we were excited to launch MiMedx Connect, our new customer portal, providing a far more streamlined digital connection with referring practices, with many enhanced features and more in development. We are experiencing significant customer acceptance and enrolment, far in excess of our initial early adoption projections. Before I turn the call over to Doug, I want to again provide a quick update on AXIOFILL and our path forward. As you will recall from previous communications, the FDA has taken a position that because AXIOFILL is manufactured as a particulate, it is more than minimally manipulated and therefore subject to regulation as a Section 351 product or biologic drug.
As you will also recall, we followed the FDA’s request for designation process at their suggestion. In response to both the pre RFD and later the RFD, the agency maintained the position that AXIOFILL is a 351 product. They went out of their way in both responses to tell us why the 510(k) pathway is also not appropriate for AXIOFILL. This was all the more confusing since in February the FDA issued a 510(k) clearance on a nearly identical human tissue derived particular product prior to sending our RFP response. There are now three nearly identical products in the market. One has a 361 designation, one has a 510(k) clearance, and AXIOFILL, which is being classified as a 351, requiring the most time consuming and expensive path to approval. Our only available means for further appeal was to file a legal claim in federal court, which we filed in March.
Given the arbitrary and capricious manner in which the FDA is regulating these lifetime products. Because of the administrative nature of these proceedings, we expect the process to take a year or less at a cost estimated to be in the six figures. In the meantime, we will continue marketing the product, which, as a reminder, has an amazing safety and efficacy record. In addition to fighting the good fight for continued access to AXIOFILL as a 361 product, our mitigation plan calls for the submission of a 510(k) application on a human tissue derived product later this year. This product will have characteristics similar to AXIOFILL and the 510(k) cleared product, I referenced earlier and as mentioned, because AXIOFILL revenue remains immaterial to our overall performance, we believe the launch of our xenograft particulate could offset most, if not all, of any potential revenue loss if we ultimately fail to reach a resolution to keep AXIOFILL on the market.
Above all else, we hope this proceeding will shine a light on the need for regulatory clarity for the skin substitute market. Regulatory, clinical and commercial stakeholders should all be aligned in providing patient access to safe and efficacious solutions in a reasonable and consistent manner. That may ultimately result in a transition toward an increased regulatory burden for many human derived autographs like a 510(k) clearance, which is a far more reasonable pathway than a 351 approval and a resolution we would support. Now let me turn the call over to Doug for more detail on our financial results. Doug?
Doug Rice: Thank you, Joe, and good afternoon to everyone on today’s call. Thank you for joining us. I’m pleased to once again be sharing another strong quarter of results with you all today. As a reminder, and as Matt mentioned, 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. Additionally, as a reminder, during the fourth quarter of 2023, we bifurcated our GAAP financial reporting to reflect the current and historical results of our recently disbanded regenerative medicine segment as discontinued operations. Accordingly, my comments today on our first quarter 2024 results are made on a continuing operations basis and exclude the historical cost of the regenerative medicine business unit, which was suspended beginning in Q2 2023.
For a full discussion of the impact of these discontinued operations, please refer to our most recent 10-k and 10-Q filings. Moving on to our top line results, our first quarter 2024 net sales of $85 million represented 18% growth compared to the prior year period, reflecting our sixth consecutive quarter of double digit top line growth. Q1’s performance demonstrates our continued momentum following a very strong 2023 in which we grew the business by 20%. Turning to our results by site of service, we continued to see growth across all of them with a particularly strong contribution in the private office. We also saw good growth in the hospital setting, which, as you’ll recall, was quite strong last year, driven by the sales of two of our newer products, AMNIOEFFECT and AXIOFILL.
Those products continue to grow in the first quarter of this year, albeit off of more difficult comparisons. Our other sites of care, which include International, VA and other sites, were also strong in the quarter. Beginning this quarter, we will provide our revenue by product pack, specifically our wound products, which include EPIFIX, EPICORD and EPIEFFECT, and our surgical products including AMNIOEFFECT and also our new xenograft product that Joe mentioned, recently acquired through our agreements with TELA Bio and Regenity. In light of our evolving industry dynamics, the sales of many of our same products are across multiple sites of service and our changing strategic priorities lead us to believe that this breakout, by comparison, provides a more consistent and meaningful view and enables us to report our commercial progress more effectively.
Our first quarter 2024 gross profit was $72 million compared to $59 million last year. Our gross margin was 85%, reflecting a roughly 200 basis point improvement from the first quarter of 2023. Gross profit was favourably impacted by higher sales levels and our gross margin for the first quarter benefited from a more favourable product mix compared to the prior year. Based on our expected product mix, we expect that our gross margins will modestly decline relative to Q1 over the remainder of 2024. Turning to our operating expenses, selling, general and administrative expenses, or SG&A, was $55 million, or 65% of net sales in the first quarter, compared to $52 million, or 73% in the prior year period. We remain committed to achieving solid operating leverage as we grow the top line, even as our SG&A spend on a dollar basis will likely increase as we pay higher commissions as a result of higher sales as well as increased stock-based compensation expense.
Due to the timing of certain expenses in Q1 and continued sales growth, we expect SG&A as a percentage of revenue to decline moderately for the remainder of 2024. Our first quarter R&D expenses were $3 million, or about 3% of net sales, roughly flat compared to the prior year period. We continue to expect our R&D spend to modestly increase on a relative basis compared to 2023 to mid-single digits as a percentage of net sales. We mentioned last quarter that some of this R&D spend will be driven in part by investments in data generation for our products and specifically on a robust trial for EPIEFFECT that we expect will confirm the utility we are seeing in the marketplace as an important wound care solution. GAAP income tax expense for Q1 2024 was $2 million, reflecting an effective tax rate of 21% compared to a negligible amount in Q1 2023.
Our effective tax rate as compared to statutory tax rates this quarter was favourably impacted by stock-based award vestings. By comparison, our income tax expense in Q1 2023 was negligible due to valuation allowances. As a reminder, we will continue to use a 25% long term adjusted effective tax rate to report adjusted earnings. Our first quarter GAAP net income from continuing operations was $9 million, compared to a net loss of $2 million in the prior year period. Adjusted net income for the quarter was $10 million, or $0.07 per share, compared to a loss of $3 million, or $0.03 per share in the prior year period. First quarter 2024 adjusted EBITDA was $19 million, or 22% of net sales, compared to an adjusted EBITDA of $9 million, or about 13% of net sales in the prior year period.
Turning to our liquidity, our first quarter cash and cash flow are typically impacted by revenue seasonality as well as customary compensation and other seasonal cash outflows. In the first quarter of this year, we also repaid the $30 million borrowing under our revolving credit facility that we had drawn on as part of our refinancing earlier in the year, and we made a $5 million payment to TELA Bio related to our product portfolio expansion into xenografts with Regenity biosciences. As a result of all this, at the end of Q1, the company had $29 million of net cash and we continue to demonstrate solid free cash flow conversion with $5 million of free cash flow during the first quarter, compared to an outflow of $5 million in the same prior year period.
I will now turn the call back to Joe. Joe?
Joe Capper: Thanks Doug. As you have just heard, we had another outstanding quarter, once again exceeding expectations. Net sales were $85 million, up 18% in the quarter. Gross profit margin increased to 85%. Adjusted EBITDA was $19 million, or 22% of net sales in the quarter. We again grew in all sites of service, refinanced our debt and acquired the rights to commercialize our first unit product. Now let me turn to the local coverage determinations, or LCD’s, that were proposed in unison by all seven of the Medicare administrative contractors late last week, in effect creating the equivalent of a national coverage policy. Similar to last year’s proposal, the new LCD’s call for a utilization cap of four skin substitute applications per case.
Importantly, this year’s proposal allows for additional applications based on medical necessity in instances when a patient’s wound needs more help achieving closure. The proposed LCD’s also again significantly limit the number of products approved for reimbursement at 15 based on published non-biased clinical evidence. While the non-approved product list specifically prohibits reimbursement for nearly 180 other products currently on the market. There will be a comment period which will end on June 8 and the LCD’s will be finalized and go into effect sometime thereafter, likely not later than October 01 if they follow the same timeline as last year. What does this mean for MiMedx? Two of our products, including our flagship EPIFIX product, are among the 15 approved for reimbursement.
Unfortunately, EPIEFFECT is not on the list due to a lack of sufficient published evidence to date. This is simply a matter of timing. Even before the recent announcement on these LCD’s, we had committed to funding and have designed highly powered randomized controlled trial for EPIEFFECT, which will soon be underway. Additionally, we have been building a strong body of real world evidence since market introduction. As such, we will engage directly with the Max and CMS in order to ensure the most expeditious path to qualify at the effect of coverage. If implemented as proposed or even in a slightly modified format, these LCD’s will certainly cause some level of disruption in the market, at least in the short term. However, given the balance of our business portfolio, our commitment to evidence-based medicine, and our much improved financial profile, I believe we are better positioned than most to navigate the changes and expect us to benefit in the longer term under this new reimbursement structure.
The bottom line is that something clearly had to be done. The blatant abuse of the payment system and the cost inflicted on Medicare trust fund has gotten way out of hand. We’ve been fairly vocal about the need to clean up the bad behavior in this market for some time, while ensuring continued access to much needed healing solutions. We will continue to provide input as this will most likely be an evolving situation. In terms of guidance, we will not be making any changes at this point given what has been communicated. Were it not for the potential disruption associated with the proposed LCD’s. We would have been able to raise guidance based on the outstanding quarter we just had and we believe when everything is finalized with the LCD’s, MiMedx will be in a strong position to compete and grow our share in the market for advanced wound care products.
We will keep you informed as we learn. More importantly, these LCD’s do not affect the efforts and strategy underpinning our surgical business, which we think has a bright future with a large and growing addressable market, particularly as we expand our product portfolio. In closing, I would like to congratulate and thank the entire MiMedx team for delivering another excellent quarter. I am confident we will navigate any potential changes in the market and continue to stay focused on helping to improve the lives of the many people who are treated with our products. With that, I would like to open the call to questions. Operator, we are now ready for our first question. Please proceed.
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