MiMedx Group, Inc. (MDXG) Earnings Call Transcript & Summary

Good morning, and welcome to MiMedx' Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Hilary Dixon, MiMedx' Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator, and good morning. With me today are Tim Wright, Chief Executive Officer; and Pete Carlson, Chief Financial Officer. Additional members of senior management will also be available to answer your questions. Before we begin, I want to point out that we issued 2 press releases recently announcing key additions to our senior management team. Dr. Rohit Kashyap, as Executive Vice President and Chief Commercial Officer; and Dr. Robert Stein as Executive Vice President, Research and Development. I also want to highlight that on August 3, we filed our definitive proxy statement and announced that we will hold our 2019 Annual Meeting of Shareholders on August 31, 2020, in a virtual format. The press release reviewing second quarter 2020 financial results was issued on August 4 and is available on our website. I'd also like to remind you that remarks made during today's call include forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, actual outcomes and results are subject to risks and uncertainties and may differ materially from those anticipated due to many factors. Listeners are directed to the risk factors set forth in MiMedx's 2019 annual report on Form 10-K and the second quarter 2020 quarterly report on Form 10-Q for factors that could cause actual outcomes and results to differ materially from those reflected in the forward-looking statements. The company assumes no obligation to update or supplement any forward-looking statements, except as required by law. This call will also include references to certain financial measures, such as adjusted EBITDA, and adjusted EBITDA margin that are not calculated in accordance with generally accepted accounting principles or GAAP. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website. With that, I'm pleased to turn the call over to MiMedx's Chief Executive Officer, Tim Wright.

Thank you, Hilary, and thank you to everyone joining us on the call this morning. I could not be more pleased to say that MiMedx is current in its financial reporting requirements. Filing the second quarter Form 10-Q represents a significant milestone for our company. And it's the first time since 2017 that MiMedx has timely filed an annual or quarterly report. Over the past year, my primary priorities have been to restore the financial integrity of the company, build a capable and cohesive management team, progress in the resolution of the company's legal matters, refine the company's approach around enforcement discretion in compliance with the FDA's regulatory guidance for human cell and tissue products and refine the next steps in advancing our pipeline. Each of those priorities and our future growth is strengthening our leadership team. We are fortunate to have attracted 2 highly seasoned executives to MiMedx, both of whom are well regarded, high-performing leaders. First, in late July, we announced Dr. Rohit Kashyap was joining MiMedx as Executive Vice President and Chief Commercial Officer. Dr. Kashyap is an accomplished strategic leader with experience in building successful global commercial operations, and a track record of delivering growth and transforming business, product portfolios and building high-impact teams. Dr. Kashyap brings more than 20 years of medical device experience to MiMedx with a solid track record of performance in developing strategies for market creation and commercial models that will deliver value to patients and health care systems. I'm confident that with his breadth of industry experience, he will drive growth with our in-market brands, expand market awareness of the growing prevalence in difficult-to-heal chronic wounds and diseases such as diabetes that can cause such wounds and communicate the clinical and economic value of our product portfolio. Second, yesterday, we welcomed Dr. Bob Stein as Executive Vice President, Research and Development. Bob will lead our product and pipeline development priorities. Noted for his significant contributions and accomplishments in medical research and development, Dr. Stein brings to MiMedx more than 40 years of experience across multiple pharmaceutical and biotech companies. He has served as a lead contributor in the discovery and registration of 8 marketed drugs and is a highly regarded and respected industry scientist. Dr. Stein is broadly known for his expertise in numerous phases of product development, particularly in the areas of molecular and cellular biology, biochemistry, animal pharmacology, drug metabolism and safety assessment, among other things. He led and supervised large groups of scientists and physicians for more than 15 years in major therapeutic areas. In addition, I'm pleased to share that one of Dr. Stein's responsibility will include the formation of a new scientific advisory board. The science of regenerative tissue technology holds tremendous promise and our team is committed to advancing category science and demonstrating value so that patients can access the care they need. He brings the extensive development, regulatory and registration expertise necessary to advance the rigor of placental-based science and accelerate the transition of our category in line with recent FDA guidance. Adding these 2 highly qualified industry leaders, along with extensive experience of the executives we have attracted to the company over the past year demonstrates our commitment to strengthening our leadership in advanced wound care and advancing our pipeline to registration. Our senior management team built both from those joining the company over the past year and the formidable existing talent within the organization, who have stepped into leadership roles, possess the training, skills, integrity and experience to act strategically, differentiate our products and lead the category with future innovation in tissue science. I look forward to virtually introducing you to our leadership team at our upcoming 2019 Annual Meeting of Shareholders. When I joined MiMedx, this is why I came and it is why these leaders also came, in order to restore, reshape and transform the potential for MiMedx to make a meaningful difference to all of our stakeholders, whether they're an investor or a patient or an employee. Allow me to expand on this. Our products are derived from human placenta through a rigorous process, whereby the mother consents to donate her placenta for medical purposes. The placenta is a sophisticated biological system that supports growth in healing. And create a platform to develop innovative and useful products, immune care and other areas, such as musculoskeletal applications, which we are studying in the clinic today. What sets us apart is the possibility to transform not only MiMedx, but the advanced wound care category as a whole. Our experience in wound care can guide our understanding of the properties and the utility of placental tissue in other applications. As a science-based company, we have the opportunity and the responsibility to advance science that reinforces the efficacy and safety of our products and uses the potential of placental science to form the platform technology. We are investing in research and development, CGMP manufacturing in our commercial organization as the primary drivers for growth and operational excellence. We believe that we now have the leaders in place to realize the company's value potential. Now let me turn to the impact of COVID-19 on the business. We continue to closely monitor key performance indicators across the business. Some indicators do point towards a recovery, although there is still significant uncertainty. The ongoing pandemic has impacted the company's ability to access various sites of care across the country, as patients stayed away and in some areas continue to stay away from hospitals and other medical facilities. Pete will provide additional details shortly in his discussion with you. I'd like to address the recent extension of enforcement discretion by the U.S. Food and Drug Administration, or the FDA. Last month, the FDA announced an extension of its enforcement discretion policy from November 30, 2020 to May 31, 2021. This applies across human cells, tissues and cellular and tissue-based products in the industry. The FDA outlined the extension is warranted in light of COVID-19 public health emergency and the unique challenges presented in recruiting clinical trial participants, in conducting clinical trials during the pandemic. Although in extending the deadline, the FDA did not change its views on the regulatory criteria applied to tissue-based products like those that we develop and produce, the FDA did state its intent to give manufacturers additional time to determine if they need to submit an IND, investigational new drug, or a marketing application and if an application is required to prepare the IND or marketing application. Now as a leader of this important therapeutic category, we welcome and support the FDA's guidance to clarify regulatory standards and will continue to work proactively with the agency. This includes proposals to the FDA on enforcement discretion matters, proactive communications and increased dialogue with the agency and the implementation of improvements that further strengthen the company's quality systems, along with the advancements of our clinical pipeline and IND studies. MiMedx is well on its way towards compliance, good manufacturing practices, or CGMP, including the filing of additional INDs and advancement of our manufacturing processes that we've previously described. While we appreciate the FDA's extension of enforcement discretion period, the extension does not affect our continued drive to aggressively transition our pipeline products to compliance within biological standards. We are advancing our purity, potency and identity tests to demonstrate consistency and reliability of the manufacturing process through a rigorous focus on chemistry, manufacturing and controls. We are continuing to enroll patients in our IND trials to demonstrate the safety and efficacy of our products. As noted last month, we've responded to the FDA's 483 observations from December 2019 and have completed all committed corrective actions. We are preparing to schedule in the phase meetings with the FDA to review our progress with our ongoing clinical trials and outline proposed next steps. Timing for this will be dependent upon FDA feedback and/or availability. We have commenced the necessary steps to file INDs of our placental tissue matrix and for our injectable micronized placental tissue for the treatment of a broad range of wound types. These actions demonstrate that we're moving forward expeditiously in compliance with regulatory standards that elevate the standard of care in this industry and fully support the transition outlined in the guidance to biological product standards. I encourage other companies in our sector to adopt this similar focus on product and regulatory standards by which our products are being evaluated before they reach the patient. I would now like to turn over the call to Pete Carlson, who will provide you with overview of financial results.

Thank you, Tim. Good morning, everyone, and thank you for joining us today. In the past 5 months, the company has filed 2 10-Ks with audited financial statements and 5 10-Qs. These milestones demonstrate our goals of transparency and action as we continue to position the company for growth. Tim discussed his reasons for taking the role here at MiMedx and noted the quality of the leadership team. I joined the company to help reestablish a practice of regular financial reporting and to raise the bar on our operating controls and information systems. I am pleased that we are at the point where we can talk more transparently about the business on a timely basis. Now let me talk about our second quarter results and take a minute to thank our managers and employees for their responsibility, diligence and commitment, particularly during the COVID-19 pandemic. Our cost containment actions have been effective and have helped offset the impact of the pandemic and second quarter sales. The business is operating efficiently and we continue our efforts to ensure effective product support and service for our customers and access to our solutions for patients and families. Net sales for the quarter ended June 30, 2020, were $53.6 million, primarily recognized on an as-shipped basis, a 20.4% decrease compared to net sales for the same period in 2019, recognized on a cash receipts basis. As a reminder, from January 1 to September 30, 2019, revenue was recognized on a cash basis, consistent with the treatment in the 2018 Form 10-K. From October 1, 2019 forward, revenue is primarily recognized on an as-shipped basis similar to most companies. For the quarter ended June 30, 2020, revenue includes $1.7 million of cash collected related to sales made prior to the transition in the company's revenue recognition methodology at September 30, 2019. I encourage you to read the notes to the financial statements for more information. The decrease in net sales resulted primarily from the COVID-19 pandemic, causing cancellations and postponements for many elective procedures. Consistent across many companies in our sector, the restrictions affected all product lines and materially impacted product applications across multiple sites of service including hospital outpatient, hospital inpatient and physician office settings. I will address this more in a minute. Net loss for the second quarter of 2020 was $8.5 million, which included $11.4 million of investigation, restatement and related expenses. Our adjusted EBITDA in the second quarter of 2020 was $10.2 million, an improvement over 2019 despite lower sales volume. You see this in the percent of sales, where the adjusted EBITDA margin in the second quarter was 19.1% compared to 14.1% in the second quarter of 2019. Gross margin in the second quarter of 2020 was relatively consistent with the prior year at 84.7% compared to 85.5% in the second quarter of 2019. Selling, general and administrative expenses, or SG&A for the second quarter of 2020 decreased $4.4 million or 26.3% compared to the second quarter of 2019. The decrease was driven in part by a temporary decrease in salaries, travel and other expenses as part of our expense management aimed at mitigating the impact of the COVID-19 pandemic. Lower commissions also contributed to the decrease in SG&A. In addition, the company reported a year-over-year decrease of almost $5 million in legal, consulting and accounting expenses not covered in investigation, restatement and related expense category. SG&A expenses were lower this quarter because of the cost containment actions implemented across the company. I will note that many of these initiatives were temporary and we expect SG&A to increase the rest of the year. However, going forward, we do anticipate that with an increase in sales, we can leverage our normal run rate operating costs. As I mentioned, investigation, restatement and related expenses for the second quarter were $11.4 million. Included in the results for the quarter is a benefit of $5 million from insurance coverage payments received related to litigation involving the company, its current and former directors and former officers. As indicated in our filings, the Audit Committee investigation was completed in 2019, and the restatement costs essentially ended in the second quarter, with the filing of the 2019 Form 10-K in early July. As such, the remaining costs in this category relate to legal matters extending from the Audit Committee investigation, which can be classified into 3 buckets. First, the expenses for legal services for matters in which the company is named. Second, resolution costs, if any, for those matters; and third, costs incurred under indemnification commitments for former officers and current and former directors involved in legal matters related to their time with MiMedx. Research and development expenses for the second quarter of 2020 were $2.3 million. COVID-19 has affected our clinical trial enrollment, similar to other companies and the results for the quarter reflect this. However, while expenses are down compared to the prior year, the company expects these costs to increase over time as we invest in additional clinical and scientific research, including internal product development, clinical efficacy and economic data and preclinical research supportive of future growth objectives. The additions of doctors, Dr. Kashyap and Dr. Stein demonstrate our commitment to category leadership and our belief that our investment in commercial operations and research and development is core to our future portfolio and pipeline. The monthly trends help understand the impact of the pandemic on our sales volume. Net sales in April and May 2020 were down significantly compared to April and May 2019, respectively, while net sales in June 2020 were in line with net sales 1 year ago. Beginning in early July 2020, additional restrictions that again limit or postpone some elective procedures have been put in place in certain areas of the country, and in particular, in areas of the country that contribute a larger portion of sales. That being said, on a consistent basis, net sales in July 2020 were in line with July 2019 net sales. We do need to caution that future sales will depend on patients' willingness to visit health care providers for care, the company's sales force's access to health care providers and the severity of the COVID-19 pandemic across the country, including future waves of the outbreak depending on where infection rates are highest. Like many companies, we cannot reasonably estimate COVID-19's future effect on patient behavior, future demand or the financial impact of the pandemic on the ability of providers to pay for the company's products. Our donor collections have remained resilient throughout the pandemic, reflecting the actions of management to adjust recovery resources where needed and to build inventory when possible to ensure consistent supply. And we continue to take actions that protect the health and safety of our workforce, in accordance with federal, state and local public health sources that set policy. Unfortunately, people with unhealed wounds face medical urgency and for those people not able to receive care now, treating their wounds will have an even greater urgency later. We are working to ensure that we are ready to support our customers in caring for these patients. Before I turn it back to Tim to discuss the upcoming communication milestones, I will remind you that we have initiated the process for relisting our common stock and are optimistic that this event will occur before the beginning of the fourth quarter. We are encouraged to note that over the past month, trading volume in our stock, an important metric of liquidity and market interest has grown and we are increasing our reengagement with members of the financial community. I look forward to updating you on our progress. With that, I will turn the call back over to Tim.

Thank you, Pete. As you saw in our filing of our proxy statement last week, we've scheduled the 2019 Annual Meeting of Shareholders at the end of this month on August 31. The meeting will be held virtually in the best interest of safety for everybody. At that meeting, we plan to tell you where we are and outline our efforts along with the work we have ahead of us. By the end of the year, we will also hold our 2020 Annual Meeting of Shareholders. At that meeting, we will share our vision for where we are going over the next several years and how we plan to achieve measurable progress to get there. We have effective products and a promising pipeline with the potential to address unmet patient needs as a platform technology across multiple applications. The science of regenerative tissue technology holds tremendous promise for millions of people who suffer with chronic, difficult-to-heal wounds. And our commitment is to advance category science and demonstrate value so that patients can access the care they need. MiMedx is under new and significantly experienced category leadership. And our team is dedicated to transforming the culture, instilling operational excellence across the company and realizing the company's value potential. We continue to take actions that focus on our patients, enhance our business resiliency and restore the company's financial integrity and reputation. We're moving forward. We will now take your questions.

[Operator Instructions] Our first question is from Eiad Asbahi from Prescience.

This is Eiad. Yes, your most recent 10-K, you guys disclosed promising preliminary results of your knee OA and plantar fasciitis trials, which both showed significant separation between the treatment in the control group. Our assessment is that the pipeline could revolutionize the treatment of an assortment of musculoskeletal degenerative disorders, with OA alone potentially adding billions to the value of the company. We're highly encouraged by the company now making major investments in the pipeline through the hire of scientists and other highly credible personnel. Can you articulate your base case on the dollar value potential of the pipeline?

Yes. The -- as you know, the osteoarthritis of the knee is a well-characterized market. We're not in a position today to share with you base case or an upside case on this. I do believe that at our shareholder meeting on August 31, we'll be prepared to share that with everyone.

We have reached the end of the question-and-answer session. I will now turn the call over to management for closing remarks.

Thank you for joining us today. We have another call -- caller.

We have a question from Brian Finn with FIN Capital.

Congrats again on getting everything that you had done here. I guess I had a question on kind of market share and the fact that over the last couple of -- last 2 years, you had to play defense on a variety of fronts. And at this point, it seems like all those distractions are basically behind you. What are sort of the incremental things you guys can do to start competing and winning back market share over the next 6 to 9 months here within the wound care market?

Brian, it's Pete Carlson. As we think about the growth opportunities, really split it between the 2 business -- between 2 components of our business. As we just mentioned, we still need to and do plan to in the near term, give people an understanding of some of the market size related to our injectable and granular product, what we collectively refer to as micronized. And we -- so that is -- and that runs around 15% of our business. So if you think about the 85% that are the skin substitute tissue products, we think about growth really in 4 ways. And this is what you're going to see us act on. The first is just market growth. That seems to be in the high single digits in most people's mind and we tend to agree with that. We can take advantage of that growth in multiple ways including some boots on the ground. Secondly, we think -- and probably the biggest opportunity is, we think there's an opportunity to expand the market beyond sort of the normal growth. You'll hear us talk about apathy as a competitor or a barrier. And so this is where we want to use our clinical support as well as economic data to educate more and more people about the effectiveness -- efficacy of our products. So that's the second area. The third is business development. We have Stan Micek on as -- the focus on that area, and that can come in many ways, partnerships or other licensing arrangements, et cetera. And then the final -- the fourth one that we talk about. Admittedly, this is a little bit longer term, but we do believe there are opportunities outside the U.S. to further expand the product. So those 4 growth areas, again, just market growth, expanding the market, business development and international opportunities are how we see. Tim, do you want to talk about how we can leverage the AHRQ results?

Yes. As many of you have -- based on our previous discussions with one another on calls, we've discussed the AHRQ results. This was an independent study that was conducted with this agency. It was basically a meta-analysis that was conducted, where the -- there were 76 commercially available skin substitutes, of which 25 had clinical studies included in the document. AHRQ conducted a literature search yielding 164 studies and 81 other submissions through their SEADS program. Only 22 of those randomized controlled trials met the inclusion criteria. Of the 22 randomized controlled trials, MiMedx had 6 included in the final briefing. Of the 22 studies reviewed, only 12 were assessed as low risk of bias, of which 5 were MiMedx' randomized controlled trials. The other 10 were assessed as moderate risk of bias. This assessment was the first amniotic NIM brain products that AHRQ had reviewed for the treatment of chronic wounds. EpiFix was noted to have the most randomized controlled trials and had a low risk of overall bias. A statistically significant finding. Of course, the overall conclusion in the 2020 assessment is that additional studies are needed, which we fully support. This is in perfect alignment with our strategy to elevate standard of care and commit to operational excellence and demonstrate our category leadership.

Thanks, Tim. And Brian, just to conclude, that's the type of information we think will help us go-to-market and work on those 4 growth opportunities we talked about. And we're also working with other data that we think will help people understand the importance of our product.

That is the end of the question-and-answer session, and we will hand it over to management for closing remarks.

Thank you for joining us today for this important call. As noted earlier, we will be increasing our outreach to members of the financial community with the goal of creating ongoing transparent dialogue. Unfortunately, we'll not be able to meet you face-to-face as would be our preference. We're looking forward to introducing our new management team via conference and video calls where possible. We appreciate your interest and continued support. Thank you.

And we have reached the end of today's conference, and you may disconnect your lines at this time. Thank you for your participation.