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

Good evening, and thank you for standing by. Welcome to the MiMedx conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Notarianni. Please proceed.

Thank you, Camilla, and good evening, everyone, and thank you all for joining us on short notice. With me on today's call are Chief Executive Officer, Joe Capper, and Chief Financial Officer, Pete Carlson. A short while ago, we issued a press release announcing the strategic realignment of the company. Additionally, we have a slide presentation covering today's announcement, which can be accessed on our Investor Relations website at mimedx.com. For today's call, Joe will kick us off with some remarks about this news, and then we will be available for your questions. A replay of this call will be available on our investor site for approximately 30 days as well. 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 margins and expenses, expected market size for our products and potential time lines for clinical trials and FDA submissions and review. 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. With that, I will turn the call over to Joe Capper. Joe?

Thanks, Matt, and good evening, everyone. I will keep my prepared remarks relatively brief so we can take your questions. Today, we're announcing a strategic realignment that commences a new chapter for MiMedx. One that brings greater focus within the organization as it solidifies our intent to expand the wound and surgical business. As such, we are announcing the suspension of our knee osteoarthritis development project effective immediately. We expect this move will dramatically improve our financial profile and provide enhanced flexibility to support our growth initiatives. I realize this may come as a surprise to some of you in the investor community who had a particular interest in this program and certainly to those of you within the organization who are directly impacted. I want to assure you that this was a decision that was not made lightly and only after thoughtful deliberation. Let me start by providing some background as to how we came to this decision. As was previously announced, the company engaged the assistance of a strategic advisor last year to help us determine our most impactful path forward. Naturally, when I joined the company nearly 5 months ago, I made a high priority to conduct a strategic review of the business. The KOA program was a particular interest given the numerous hurdles it faced, lengthy timeline to commercialization and significant capital needs measured against the product's long-term potential. Over the months, we worked closely with our advisors to assess the potential market opportunity, a variety of risk factors, the cost, the time line, other potential challenges and our ability to attract an investor or a strategic partner as an alternative to funding the project on our own. Here is what we concluded. We have great confidence the product is safe and effective. We have a highly skilled group of people working on the project, along with excellent external partners. And there is most assuredly a large unmet need for more effective knee OA solutions. However, we also concluded that this project has considerable risk associated with it. The regulatory environment is particularly uncertain and the time it would take to get to market remains unclear. As a result, we could no longer justify this sizable multiyear investment. This was particularly true when measured against other opportunities before us. In the final analysis, the risk simply outweigh potential rewards. I am certain that this decision is the right one for this company. I would like to express my sincere gratitude to all of the members of the Regenerative Medicine division, who worked so diligently on the KOA project. This decision was in no way a reflection of the work we were doing, nor was it a reflection on the safety and efficacy of our product, at no time or any of these things in question. Thank you for all of your contributions to MiMedx. Regarding the financial implications of today's decision, we estimate the onetime wind-down expenses to be approximately $5 million. On a pro forma basis, assuming the realignment had occurred on January 1, 2023, we expect that it would have added approximately $25 million of adjusted EBITDA for the full year 2023. This change will materially improve our operating margins and free cash flow generation, providing us with the ability to accelerate our existing growth plans. As I highlighted on our last 2 calls, our near-term success won't be determined by how well we execute in 3 basic areas. Our primary objective is to build on our leadership position in the wound and surgical markets by enhancing our product portfolio and expanding geographically. Our second growth objective is to develop opportunities in adjacent markets to create additional revenue drivers for the company. And third, we want to build a corporate discipline around expense management, rationalization and continuous process improvement. Suspending the KOA investment is perfectly consistent with this plan and dramatically enhances our likelihood of success, particularly with the first 2 growth objectives. Given our expectations for future margins and free cash flow generation, this move will create more options for us to invest in our growth and accelerate a path toward value creation. The wound and surgical industry presents numerous untapped opportunities for growth. MiMedx is a pioneer in the field of placental biologics, and we believe we are the leading provider of amniotic skin substitute products in the U.S., providing a strong foundation from which to build. We are committed to the relentless innovation of new products add to the generation of unmatched clinical and scientific evidence to support their use. Our 2 newest products are clear evidence that our R&D efforts continue to advance the science of placental biologics. We are also dedicated to improving access to our products with a large and growing patient population both domestically and internationally. With clarity of focus, these are all areas to redouble our efforts. Since the second quarter is still ongoing, I will refrain from commenting on our operating performance. However, we are quite pleased with the progress the company is making to date. And as such, we are also using this occasion to raise our full year outlook for net sales growth percentage from the low double digits to the mid-teens. We will cover the company's results in more detail on our second quarter earnings call in early August, however, we are highly confident that our business will continue to show improved margins with scale. In fact, in the second half of 2023, we should have an adjusted EBITDA margin approaching 20%. In closing, I would like to emphasize that I fully understand today's news is certainly difficult for the members of our team who're being impacted. But we would not have made this decision if we didn't strongly believe that it is in the best long-term interest of the organization, the patients we serve and our shareholders. With that, I would like to open the call to questions. Operator, we are now ready for our first question.

[Operator Instructions] And our first question is from Carl Byrnes with Northland Capital Markets.

One of the comments stated in the press release and also applied is the strategic realignment would provide you with additional financial flexibility. Are you kind of couching that with respect to potential near-term M&A opportunities or acquisition of complementary products for wound and surgical.

We've a pretty active corporate development kind of program/funnel that we're building within the organization. I would say we're prepared to talk about anything publicly. But the increased flexibility that we talked about comes with a much improved financial profile and certainly, it gives us more options.

Our next question is from Brad Bowers with Mizuho Securities.

So I just wanted to kind of hear you. You said that there is incremental opportunity or investment. I guess that kind of says that there's maybe some previous underinvestment. So I wanted to kind of hear how much of the run rate savings is going to be really falling through. I appreciate the guidance on the back half margin but also wanted to kind of hear if you could expand on the kind of programs or investment where you think you'd see the most focus. And I guess, which of the lines, we'll see the most savings. I would imagine most of that will come at R&D, some SG&A, but any kind of color you can give on that?

Yes, I'll let Pete talk about the numbers associated with it. As far as where we do best, I think stick to the strategic plan that we've already outlined. We think that there's a lot of opportunity to go deeper and wider in both wound and surgical. Surgical has a lot of opportunities. So some of that is ongoing already with internal product development initiatives. We talked about the need for more clinical research in that space. So there are areas that will increase our focus, but Pete, might you touch a little bit on the numbers.

Yes. Again, the -- as Joe mentioned, what you're looking at is the Regenerative Medicine business unit going away and as you look across the year, that's where we think this $25 million in savings would come from. I will remind you that we talked about the clinical trial being a $20 million to $25 million cost per trial and the 2 trials we're having to look at and in the Regenerative Medicine. That was for the trial itself. And then the business unit had other projects going on as well as team members. So that's where you get to that $25 million. And we do think there is a strong -- obviously, that's a very impactful number to our bottom line both at our performance metric, adjusted EBITDA as well as at the net income level.

Got it. And then if I could do one follow-up here. I appreciate the kind of the [indiscernible] rate 20% here. I assume some fluctuation, but should we expect not to give 2024, I guess, to put the cart before the lead, but I mean, is that a margin that you think you could sustain? Or is that kind of a benefit from, I guess, kind of be in between of losing the regenerative medicine program and still kind of deciding where to allocate incremental spending on the rest of the business.

Yes, I don't think we're prepared to put a number like that, a hard number out for 2024. I think we have to see how the business continues to evolve. I will say that we're very pleased with the margin accretion that we're getting as the business scales. So I expect to see that continue as the business continues to grow. So again, we'll have to watch and see, but very pleased with the leverage we're starting to get out of the business. A lot of that was steps that were taken last year coming into this year. So the business is definitely operating more efficiently.

Our next question is from our from Swayampakula Ramakanth with H.C. Wainwright.

This is RK from H.C. Wainwright. So just trying to understand on the savings part of it, the distribution of the savings. How big was the Regenerative Medicines unit within the entire company? And also thinking about trying to focus just on the wound and surgical, does that mean you will take some of that savings and put it back into the wound and surgical division by either increasing additional sales personnel or maybe going to additional geographies, so that you can start building that franchise into a stronger entity.

Yes. RK, it's Joe. I'm not really prepared to talk at a tactical level, where we see investment opportunity for the business. So just in general, I will say that we are very pleased with the progress that is being made within the wound and surgical division. We think that the commercial organization is performing at a high level, and we think there's continued opportunity for even greater improvement. The sales organization has went through quite a few changes over the last few years. They're starting to get really good traction in the marketplace. The leadership team has been in place a bit longer. But so we're seeing above average performance there. And we think that that's something that warrants more investment and potentially greater than we are today. But again, I'm hesitating because I don't want to really get into kind of technical allocation of resources at this point.

And RK, it's Pete. If you look at just the most recent quarter, the Regenerative Medicine segment usage, if you will, not contribution, was just about $5 million. And as we've said, as the trial ramps up during the year, that cost -- we had expected that cost to increase.

Our next question is from John Vandermosten with Zacks Investment Research.

So for the KOA program, I mean, there's been a lot of work already done for it. Is your goal is to potentially find a partner for that?

Yes. John, I would say we would have loved to, right? I'm working with our advisor, we did try to evaluate that as best as possible, and we were not able to generate interest. If somebody were to merge in the very immediate future, we would love that conversation with them. It's just the project. But again, when we looked at all the risk factors, all the buckets of risk, if you will, and funding this on our own and the potential market when we got there, just to make a sense [indiscernible] longer.

Understood. And with the cost of capital going up, traditionally calculated discount rates has probably shifted some programs from positive, negative NPV. Was that part of the role? So I mean if we looked at this 1.5 years ago or so, we may not have had the same decision?

Yes. If we looked at cost -- it was a factor.

It was one of many factors. The -- over that last 1.5 years period you referenced, a lot of the factors have changed. So you really can't point to any one factor.

We spent a lot of time looking at the difference in the environment when it went down this past 3-plus years ago until today. And that, among other factors, change quite a bit.

Got it. And another thing that came up in my mind, it was just the regulatory uncertainty, which compared to pre-COVID is a lot different now. I mean, I think there are a lot of submissions to the FDA and interaction with the FDA to get either delayed or pushed off or not approved, not maybe because they were bad products or whatever, but just because the FDA was too busy with other stuff. Is that kind of lower success rate with regulatory agency and other role that you actively considered?

We did. And that was obviously one of the attributes of the landscape that we think has materially changed over the last 3 years.

Yes. No, I agree with that completely. And then one of the things that MiMedx historically done is they've pursued regulatory approval in regenerative medicine. Are you going to have any other efforts to pursue regulatory approval for anything? Or is that all put aside?

I wouldn't say all put aside, obviously, not today, but this is expertise and technology that we're building within the company. And so it may be in our future, but obviously not today.

Got it. And last one for me is on free cash flow. I think we were expecting MiMedx to turn free cash flow positive very soon. Will this change that at all? What -- when should we expect the cash from operations to turning to positive territory?

Yes. So again, when you're talking about our reference to free cash flow, a metric we were using was sort of a P&L-driven metric of adjusted EBITDA less the CapEx and patent costs. We had a very solid adjusted EBITDA result in the first quarter relative to where we've been. So that was turning positive as we saw it in the quarter. We're beginning here in 2023. And this only helps that. The $25 million of savings are cash savings. So it's a very strong impact to free cash flow.

Okay. And I think you had said $25 million of cash savings, about $5 million of costs related to this change.

That's right.

Yes. Yes.

[Operator Instructions]. there are no further questions at this time. And with that, I would like to turn the floor back over to CEO, Joe Capper for closing comments.

Thank you, and thanks, everyone, for your questions and for your continued interest in the company. We look forward to speaking to you again in early August to discuss our second quarter results. That concludes today's call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.