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

So thanks so much, everyone, for joining us. We're very pleased to have with us this afternoon the team from MiMedx. We have Tim Wright, Chief Executive Officer; Pete Carlson, Chief Financial Officer; and Rohit Kashyap, Executive Vice President and Chief Commercial Officer. Gentlemen, thank you very much for taking the time to join us today. I'm not sure if you can hear me or not.

Here we go.

Matt, can you hear us now?

I can. I can. Did you catch anything that I just said?

We did.

We did. Sorry.

Thanks for the invite.

You're -- it's our pleasure. So I wanted to -- I thought maybe a good place to start, there's an awful lot to talk about and updates from Q3, updates on the commercial side, on the clinical side. But I thought maybe we'd start with the current environment and sort of a commercial update on growth in the quarter and expectations for the year, if that's okay. So maybe the impact of COVID in Q3, expectations for Q4, maybe standout surprise and some insights coming out of your product lines in Q3. Would you take us through that?

Rohit, do you want to cover off the base business and our solid quarter?

Yes. Again, as it pertains to COVID, I'll just get that out of the way. Again, it's always unpredictable. What we saw, looking in the rearview mirror, in Q3 is there were pockets of high impact from COVID. It definitely impacted some of our major markets, specifically Florida and Texas. With the increase in cases over there, there were access issues, there were procedure delays and so on. There are other pockets as well. But overall, the business environment and the ability to get in touch with customers and be in front of them continues to be -- continues to improve. We have seen pockets where, towards the end of Q3 and as we get into Q4, where there's another kind of delay, which relates to vaccination mandates, which have created staff shortages in some hospitals with the news all around, but we experience it, which have led to entire wings of hospitals shutting down [indiscernible]. So it's a different kind, but it's related to COVID at the same time. That's what we are seeing. But we feel like -- having learned from the last year and understanding the changes that have happened, some of which might carry on in the environment going forward with how patient flow has changed and where treatment sites are and the flexibility in that and our ability to go into multiple sites of care, whether it be a hospital, a wound care clinic or the private office, positions us well to operate in this fluid environment. Just we push -- we push the pedal harder on one and pull up on the other as need be in order to execute as we go forward during this pandemic. We suspect Q4, again, to be similar, where we have some disruptions from the factors that I just mentioned, but we feel we are well positioned to execute strongly. Again, Q3 was a good quarter for us, but it wasn't an accident. It was based on all the investments that we started making towards the end of last year leading into this year, with the expansion of sales team, with our focus on making sure our team is trained to deliver the value message that we want for our customers and differentiating ourselves from competition and being able to target the right customers with a trained message and a trained team. So those things have helped contribute to the growth, but we think those things are not one-offs. It will continue to help us drive our growth coming into Q4 but also going into next year. And as we've indicated in the past, we continue to feel confident that we can deliver a double-digit growth -- more than 10% growth with those efforts.

Excellent. And not to put too fine a point on it, but in Q4, have you talked at all about sort of what the trajectory looks like at this point, improvement, stable, baking in some room for things to potentially get tougher towards the end of the year? How would you describe the assumptions you made or what you're seeing so far in Q4?

I think I would characterize it as stable in Q4. I think what I would say is as we look at year-over-year, I think Q4 will have a tougher comparison from last year just because there was a big rebound last year in Q4 after a good 8 -- 6 or 8 months of COVID. So I think we have a tougher comparison to work with. But otherwise, the environment is stable. And with -- like I said, with some of the things that we have adapted to make us feel confident that we can operate in any environment, unless there's a major disruption in there. But so far, there's every suggestion that it will be stable with almost 5 weeks gone into the quarter so far.

Okay. And not to -- before we sort of jump into some of the comments you made on the quarter around surgical recovery sales and core business and base business sales, I'm curious because you mentioned staffing and the vaccine mandates and the impact it's had. I think a lot of folks are trying to understand, is staffing an issue of things like retirement or just people leaving the field of health care or burnout or vacations, which I believe that it is. But what -- to what degree is mandates part of the problem? What do you see or what do you -- from your perspective as being a bigger part of the issue?

I would characterize it as discrete one-off events. It's not a wave. It's not something that's a wave that's building momentum in terms of that. But there are pockets, like the normal operations on one side of the street and one hospital that's disrupted on the other side of the hospital. And it depends upon the hospital policy and their staffing and things like that. So it's hard to give a broad general statement of it. I would just characterize it as discrete events in discrete pockets across the country.

Fair enough. Yes. So then one of the things that you mentioned were -- in terms of growth were sort of this relatively strong growth in the base business. So accounting for the 351 sales you've taken out in both periods but then also specifically in the surgical recovery business. Can you talk a little bit more about both of those?

Yes, sure. Again, I'll focus in first on the surgical recovery and then come back to the base business as well. Like we said, we have seen good growth in both of those areas. The best way to characterize surgical recovery for us is we, over the last decade, shipped more than 2 million grafts. And as we dug deep to understand that, that all these grafts are not just used in wound care applications. Again, a vast majority of them are used for low extremity wounds and some other wounds as well, but there's a decent portion of usage in surgical procedures. And the intent of use in this procedure is a little bit different than wound care, whereas in wound you're trying to granulate the tissue and heal it. In the surgical procedures, many times, physicians, whether it's vascular surgeons or general orthopedic and even plastic surgeons, they're using it in order to achieve a better outcome or reduce some complication in the surgical procedure that they are trying to do. And the 3 principal drivers of why they're using it, one could be where they're trying to use the tissue to help augment the procedure that they're trying to do or repair that they're going to do is maybe they're doing a ligament repair, but wrapping it with the tissue helps with the -- that aspect of it. In another situation, they're trying to help achieve closure, which might be for an incision, where they think there's a high probability of dehiscence, but helping a tissue in there reduces the probability that dehiscence would happen or if a dehiscence have happened, underlaying a tissue helps reduce that for closure. But also in the cases where they are trying to prevent -- as a barrier function, where they are preventing adjacent tissue planes from clearing adhesion or something like that. So they will use it in these different procedures across a variety of surgical specialties. And what we have focused on over this last year is by understanding this dynamic better, is -- done some pilots, you kind of say, can we really grow this market? And is this like -- are these mavericks doing it? Or is this really a true opportunity to -- or an application of a tissue? And while we are not surprised, it's good to understand that we've always thought of our tissue having a broad platform application in different configurations. And it confirms that based on our pilot. And now we are focusing on how do we go forward in creating a true market for this? And obviously, we need to -- we have taken some time to size out the market. And so we have a good scale of size of that market and a good understanding of the size of the market. And we also understand that we have to invest in generating more than case studies and generating good sound clinical evidence in that area and have KOLs, the users who are already using it and others, be talking about it to influence their peers to do it. So that's our strategy going forward to continue to drive growth in that surgical recovery space. Part of that will be also driven with innovation because we know the tissues that we have are not ideal for the surgical application. They were designed with wound application in mind. So we will continue to develop those products as well in order to fully exploit that market. As far as the base business, which is wound is concerned, there's attractive demographics for that with the chronic wound, where the population is aging, there's diabetes, there's obesity. Those are the big trends that continue to drive underlying growth. And we have a vastly underpenetrated opportunity. So with our ability to get more access with coverage, both from CMS and from other payers, we are able to influence more and more with our data, including the AHRQ data that came out last year and then the health economic data that's come out more recently, really be able to differentiate our portfolio from -- and products and our outcomes from competitors to take advantage of both the underlying dynamics of growth and the demographics of growth, but also helping drive the penetration deeper. So those are the contributing factors, Matt, in terms of our performance -- recent performance and will also be the catalyst as we go forward.

Great. No, that's helpful. And you mentioned sort of pushing on one pedal, pushing on another pedal depending on the regional situation or what you're facing. I guess how much has the withdrawal of some of the 351 products influenced where you're -- the emphasis of the commercial organization? Meaning that, obviously, I guess, you could look at it as saying that the outpatient wound business, for example, maybe has -- coming off of that, suspending those products, has a bit more bandwidth. Is that -- are you thinking about reallocating that or shifting around capacity to sort of address other opportunities? Or is that sort of overthinking the way that you think about your commercial organization?

That's a great question, Matt. It's not overthinking it. It's what we have been thinking about for the entire last 6 months as we have dealt with this. I think at a blanket level, the first statement I would make is that we've determined early on, as we started evaluating the impact of the withdrawal of 351 products, that we would strive to minimize the disruption for both our sales teams and our customers. And given that 13% of our revenue was going away, we made a decision at that point that we wouldn't be trying to rightsize our organization for that, but instead provide our sales team with the right resources, tools and training and direct them in the right direction to grow into that 13%. And that is helping the growth in the second half of this year but will also support the growth into next year as we go forward. The second approach we took is there were a certain set of applications where those products were used, which are not ideal for tissue usage. So we know those opportunities and those treatment avenues are lost for it. But then there are some other cases where there are a few physicians who were using tissue to heal -- to treat those conditions. And then other physicians might be using injectables or particulate in order to do it. So we tried to create a connectivity between them and introduce peer-to-peer education to help some of the physicians get acquainted with an alternate, using a sheet in order to address those cases. Some physicians made that conversion. Others said, "That's too hard to fit in within my technique or my flow of my practice because it takes longer" or, "I don't like delivering the product a certain way, and we're not willing to convert." We kind of anticipated that it would be as such. So we've been able to save some of that and have been able to train our sales team in order to execute along those lines. But as we go into next year, we think we have the scale of our sales team in order to get the leverage and grow into the business. Unfortunately, it's a little bit of a deleverage right now, but will become a leverage as we go forward and grow our business.

Fair enough. And then sort of last thing on this current trends in this pandemic and surge period. Obviously, the folks who got hit the hardest in the last surge in particular and in some of the delays and postponements late last year, early this year are folks tied to procedures that require an overnight stay. And it's been good for ASCs. Alternatively, it's been good for outpatient procedures. Clinicians, I think, are sort of -- as you would expect, kind of seeking to either move their cases to those sites of care or to sort of fill out their schedule with procedures they can perform in those other sites of care. And I just wonder if any of that -- that's all been great to help sort of manage through this period, but does any of that rotate away? Does any of that go back? And does that affect MiMedx at all from what you can tell at this point?

The 2 areas that we have seen that and -- is that we are seeing a lot more of wounds getting treated in physician offices, which were probably initially treated in wound care clinics. So there's a move over there. I suspect that some of that will stay that way and not revert back. The other thing that we have seen that also impacts the flow of patients is CMS has become more accommodating in providing treatment for patients within the nursing home, where they would have otherwise have to go to a site -- another site of care, maybe a hospital or a wound care clinic, to get there. Now they can get reimbursement for treatment within the nursing home because that way, they don't get exposed. So I think that is probably going to stay. They realized that, that is more effective, productive and still probably reduces cost because they have to save on transport of these patients for nursing homes and everything. So I think it's a mixed bag in that. And some of these things, we have been able to adapt to ourselves is to flow with the patient. We are adapting our business model and saying, when patients are getting treated within the nursing homes itself, who are the clinicians who are providing that care, kind of the mobile physician because nursing home themselves are not staffed by it. So we are able to target that as an opportunity to help us in the business. Similarly, in the physician office space, we continue to look for -- where the volume shifts are and they are obviously, podiatrists, who are dealing with that, but also some other surgeons, like plastic surgeons and vascular surgeons, who otherwise were focused on their practice within the hospital and only see carryover patients in their clinic, now see clinics as the primary -- as a primary point of treating some wound cases. So we are making sure that we can target them, identify them with a sophisticated approach of targeting so that we are able to adapt our ability to reach them at the right place. We are not in the process of trying to reverse it. I think there's enough volume in each of these areas. There is a pent-up demand in each of those areas. So I don't think any area is going to -- we are going to have trouble like saying that this area is going to be -- see a shortage of patients or anything like that. I think just the mix might change a little bit on the outranges of the mix of patients.

Okay. That's super helpful. Maybe one question just as we look out to '22. I guess based on what you're willing to share at this point or talk about or think about, maybe if you could talk a little bit about what some of the key growth drivers are, what some of the key challenges are, how investors should think about balancing your double-digit growth goals for next year.

I think the growth drivers for us as we go into next year is continuing to evaluate our execution. Like I said, we have made significant investments in expansion of the team, but also training the team, continue to reinforce that. The second thing is making sure that we are able to help providers and payers understand the difference between what we have to offer as product and services compared to our competition. So being able to sell that value and carry that value message, showing the clinical effectiveness, the economic effectiveness data and, as a result, we create -- we gain disproportionate share. And the third element is we are trying to -- we've been quite successful with the launches we have had in the last 12 months with our core franchise. We are hoping to launch other products as we go into next year, and that should further help drive the growth. Another variable for us, specific as we think about 2022, is also we are preparing ourselves for our launch in Japan. We obviously have regulatory approval in there. And it's the first amniotic tissue to be approved in Japan. We think it's a great approval that we have, gives us a broad access to different kind of wounds in there. Essentially, it says you can treat any hard-to-heal wounds. It does not segment into saying only DFU wounds or only this. So that's a great place to be. We are in the process of securing reimbursement. And once we have that, which we expect will happen by middle of 2022, that will be another exciting opportunity for us and a catalyst for growth. Again, it will get started in 2022, but it's a significant opportunity as we look well beyond that for the next 3 to 5 years out from Japan as a growth catalyst.

That's very helpful. Maybe then just pivoting to the market and market trends in general. Obviously, COVID is a factor. But being kind of at the center of the amniotic tissue graft market, I think MiMedx in the past has often had a pretty good view of how the market is growing, how the segment is growing as well as things like what your share trends look like, where do you think they were, where do you think they can get to. Can you share some color on that?

Sure. I think the market, historically, I would say it's growing in the mid-single digits or like around 7% or so, it seems like, in there, based on other -- performance of other competitors and others. As far as share is concerned, I do think Organogenesis has gained some share in the market space as the outsized growth shows in their performance. But I think our -- what we have gathered is that we are not losing share. We are not losing share. We are keeping our share of the pie, and that's sourced by the growth overall in our business. But -- and what the Organogenesis has done is given the share overall in there. And some of that growth is coming from the private office channel, especially for them as they've talked about it in their mix. But we are able to perform robustly across that and feel confident that we are holding our own and will continue to. As some of the things normalize around some of the reimbursement dynamics across different cares of setting -- care settings, we feel very confident about our ability to grow and deliver on top of that 10% growth that we have talked about.

Okay. So if I can understand your comments, it sounds like you're suggesting that if you were to sort of focus just on outpatient wound clinic and maybe the acute care sites of care, that in those areas where you operate, you're saying, "We're holding share there" and Organogenesis is growing their share but through a channel which you don't compete. Is that -- am I reading your comments right, something like that or no?

No. What I was saying was in one of the channels, right, we are a diverse channel in there. I think in one of the channels, which is the private office, that's where Organogenesis is growing share. But that whole section or segment of private office is itself growing in there. So while we might be -- on a share basis, it might look smaller, we are not necessarily reducing our volume in that channel. It's just that they are growing at a faster rate than which we are growing in there.

I got you. Okay. That's helpful.

It's not a share steal from us. It's more of an overall growth.

We've always said we think there's unmet need here. So the opportunity is bigger than the existing market. And that's what -- I mean, we've always felt like anybody growing really can grow through adding to the market overall.

Got it. Okay. That's helpful. So -- and you mentioned reimbursement. Any -- it's obviously a little bit of a sensitive subject, especially for your friends at Organogenesis, I think, in the last couple of months. We'll hopefully hear more about that tonight when they report. But what's your view on sort of stability, potential changes, shifts in reimbursement pressure on reimbursement? How do you think about coverage other than another company getting more commercial payer, achieving coverage in one area or another, generally speaking?

Yes. I think when we think about the 3 segments, the 3 major segments of the market, right, which is hospital, the reimbursement environment over there is pretty stable with the DRGs because that's how the [indiscernible]. So we won't touch that. I think in the wound care clinic, we have the bundled payment. That's there. CMS came out with its ruling in new rates at the end of last week and essentially increase the reimbursement and thereby a few percent points neither here nor there maybe accounts for inflation for the most part in there. But -- so we have an outlook that is stable over there and continued to, over the last few years, increase it a little bit. And we think that it will continue that way where they will have the low-cost bundle and the high-cost bundle. We fall in the high-cost bundle, and that's pretty stable. I think the biggest amount of volatility has been in the private office space, as you mentioned, where there's chatter around some of our competitors also. And part of that has to do with how reimbursement is established over there. The reimbursement methodology over there is using a national fee schedule price, which is the reported or published average price plus 6%. And then in the cases when it is not published, the way they max -- choose to reimburse is based on weighted average procurement price essentially for them, plus 6% on an invoice price. And I think that makes it likely that it can be easily manipulated based on inflated prices in there. I think CMS is aware of that. And as part of the ruling that came out last week, they did said that all companies and -- for all their products, would have to report pricing. That's half the story. I think it moves -- advances us towards leveling the playing field in that area. We would have loved for it to be seen as also published, but I think the ball gets picked up. It's a different part of the agency that looks into that. So we are expecting that they will continue to move in that direction and level the playing field. I think it's critical because, in the end, the money comes from taxpayers. CMS is paying that as well as if the products are reimbursed at a higher price, it also puts a burden on the patient who need these products because of higher co-pay because that comes along with a higher price as well. So we think it's moving in the right direction, but that -- and it's relatively stable from that perspective. We would like for it to be level as we go forward.

Sure. Makes sense. So I think there's a couple of more subjects I want to try to cover. We have about 10 minutes left. So one is margins and cash flows. But I think I'd be remiss not to give you an opportunity to sort of provide an update or review of where things stand with your injectable products. You made some announcements early in September. You made some other kind of announcements on the call, which I won't try to summarize, but I'd love if you just took a minute to sort of give us an update and remind us of how you're looking at that going forward.

I know Pete is chomping at the bit to talk about margins, cash flow and balance sheet items. But look, we did -- in September, we had some preliminary data on our Phase IIb knee OA trial in -- for transparency reasons, and this is an obligation to our shareholders, we want to announce that [ NPF ] as soon as we could. We hadn't validated the P values. So at the earnings call, with an external consultant, we validated the P values, and they were striking in this subpopulation of patients that represent 190 patients that were enrolled early on in this trial. And then the second cohort of patients had a completely different response. But in the first cohort, after 3 months, there was a P value of less than 0.05. And consistent across WOMAC pain function in total. And then in the next 6 months -- in the next 3 months, the P value improved as well, less than 0.01. So it's a dramatic change statistically and clinically for the patients involved in this trial. That gives a form of belief that there's a -- there, that we have a, if you will, a therapeutic effect. It was puzzling -- I must say this, the performance of the commercial team in Q3 was not a surprise. We set out there to build tactical superiority, and we are executing on that. Here, it was a surprise, to be really blunt. Now we've been working through that to answer the questions I had for the R&D team was what happened? What can we learn from this? And how do we move forward? So we've had the interaction with the FDA on this as well as our Data Safety Monitoring Board from the safety side of that. And then on the efficacy side, understanding what happened in that second cohort of patients. That's really what we would like to cover off, if you will, holistically on December 7, our Investor Day. Now that Investor Day, we clearly want to answer the questions around our, if you will, biologics platform in musculoskeletal diseases. But we also want to talk about our plans for the base business as well. So we've covered off a lot of that today. We got more coming on December 7. But I'm pretty confident that we will have a definitive path forward that we can communicate to our shareholders on the 7th. And frankly, I want to make sure we do all the homework to get us there. We don't want to be coming out with partial information. So we'll get there on that.

Sure. Okay.

Yes. Matt, I'd just summarize it. We gave a little bit of quantification where we had given only qualitative aspects about the trial outcomes. We talked about our time line being impacted, we thought, by quarters, not by years. And then we told people that we think, even though it would take a couple of Phase III trials where we're only thinking one, that the cost of those is probably less than $30 million, and that $30 million will be spent over a period of 3 years. And you mentioned cash flows. And then we said, we believe we have adequate resources to support that and that we not need to go to the market to raise capital for those trials.

Okay. That's helpful. Yes. And I think that was clear from the call. So maybe just putting it together, the 2 issues, profitability, cash flows, path forward as you're defining it now even though I know we'll get a lot more detail on the 7th. If you think about the base business growing double digits and the question being, well, what kind of margin improvement or leverage can you get from that base business? Again, next question is, well, you're going to have, call it, $10 million a year or something round numbers in additional spend for this trial. If we were to just, for a moment, zoom out and say, on that base business, just to assess the health of this overall asset, is that -- is it -- do you expect -- should investors expect you to be driving leverage if we were to say ex the $10 million for R&D, which is clearly for a sort of longer-term growth opportunity -- investment in longer-term growth opportunity? Is that a fair way to think about the business? Or what can you say on that front?

It is, with an exception, as we go through 2022, that we still need to grow back into our sales force, if you will. Rohit talked about our strategic decision to maintain the field force even after losing 13% of revenue. And we have one quarter here where we've made that up, if you will. But we've got to continue to have that growth. So that's why we talked about the base business being sort of cash flow neutral over the next 12 to 15 months. And the -- when does that pivot happen? Month 12, month 15? Could it be 10? Is it 16, 17? That's going to depend on market conditions and the revenue growth, really. We do see, over time, that leverage picking up. So certainly, as we look to continue to grow the revenue at that 10-plus percent, we don't see that you have to -- that our expense base grows at a similar pace. So we do see leverage picking up over time.

Great. And that's -- and the 12- to 15-month comment that you made is inclusive of the clinical trial spend. Is that right?

No, that's without the clinical trial spend. So we use -- so we will use a little bit of cash as a company over that 12- to 15-month period for that extra investment, if you will, in the musculoskeletal opportunity. But we have that cash on the balance sheet. That's why we did the capital raise a year plus ago to invest in our pipeline and to invest in the business. We've invested in the sales force, and we'll continue to invest in the pipeline also. So it is that some amount of cash will be used for that additional investment in the musculoskeletal. And so what I was really talking about was sort of that free cash flow. So we have modest debt service, and our legal cost and that sort of drag on cash is mostly behind us. So that's really what you are getting to, is the company cash flow. Generally, breakeven in the base business, use a little bit in the near term for the musculoskeletal base business, gets back to general level or historical level of cash generation that allows us to fund those trials and other R&D activity going forward.

Great. That's helpful. So we're coming up on sort of the end of the session here. And I have a couple of other questions that we could jump into, but I don't want to start a new direction here with just a minute left. I thought I'd turn it back to you, if you have any comments you'd like to make, things you'd like to emphasize perhaps that aren't -- you don't believe are well understood by investors or ways to wrap up the session here.

Well, Matt, let me just wrap up real quick. We view our business as a -- not only as participating in the wound care market, but also this newly defined surgical recovery and as well as the injectable side of our business that's in musculoskeletal disease, that's a longer-term play. But I think it is really a testament to the platform technology that was developed here by the predecessors. It's elegant technology. We think it's got a lot of legs across many different therapeutic applications. I talked earlier about tactical superiority, and that's really driven by data. This is a science-based company. And the more we can generate data that demonstrate the clinical benefit of our products, no matter what segment we're in, whether we're in the hospital, whether in outpatient or in private practice, we're going to be able to demonstrate our products, we're going to be able to generate the best outcome for patients. And that's kind of where we're at, is generate the data, work to educate our physicians, patients and payers, and the rest will take care of itself.

Makes sense. Well, thanks very much, Pete, Rohit, very much appreciate you joining us today.

Thanks, Matt.

Thank you, Matt.

Have a good afternoon, everybody.

Take care.

Thanks. Take care.