MiMedx Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2024

There are 7 speakers on the call.

Operator

Good afternoon and thank you for standing by. Welcome to the Mymedix Third Quarter 2024 Operating and Financial Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference call over to your host, Mr. Matt Notoriani, Head of Investor Relations of MiMedx.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to the MiMedx Q3 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 mymedixdot com.

Speaker 1

Joe will kick us off with some opening remarks and a summary of our operating highlights, and Doug will provide a review of our financial results for the quarter, and then Joe will conclude with some additional updates, including a discussion of our financial goals. We will then be available for your questions. Before we begin, I would like to remind you that our comments today will include forward looking statements, including statements regarding future sales, operating results and cash balance growth, future margins and expenses, our product portfolios 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, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays. Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our annual report on Form 10 ks and our quarterly reports on Form 10 Q.

Speaker 1

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.mymatics.com. With that, I'm now pleased to turn the call over to Joe Capper. Joe?

Speaker 2

Thanks, Matt, and good afternoon, everyone. It is my pleasure to welcome you to today's call as we provide an update on our business, which continues to move in a very positive direction. For the Q3, we once again achieved year over year top line growth and maintained an excellent operating margin. In spite of the challenges in the private office and associated care settings due to the massive abuse of the Medicare reimbursement system being perpetrated in those sectors. We generate approximately 25% of our revenue from Medicare fee for service patients in the areas being impacted by this fraudulent activity.

Speaker 2

Based on feedback we have received during numerous recent interactions with relevant governing bodies, we are confident that corrective action is on the near term horizon, which we expect will restore good fiscal governance to this market. I will talk more later in the call about why we are optimistic that our tireless efforts to affect change are gaining traction. Importantly, despite these headwinds, our business continues to flourish. As you will recall, we achieved a significant structural transformation of the company in 2023, which is now not only safeguarding the business as we navigate the current disruptive reimbursement environment, but allowing us to execute our strategy from a position of financial strength. Based on our results, it's clear we have the right strategy in place.

Speaker 2

We grew the top line and generated a solid operating margin in the quarter in which our business was under duress. That makes us very optimistic about our future as we expect such headwinds to dissipate in the coming year. I'll take a few minutes to discuss the highlights of the Q3 and then update you on the progress we're making regarding our strategic priorities. For the Q3, net sales grew year over year by $2,000,000 or 3 percent to $84,000,000 in line with the expectations we highlighted on our last call and marking another solid growth quarter. I should also remind you that in the second half of twenty twenty three, we experienced significant growth, which makes more challenging comparisons for Q3 and Q4 of this calendar year.

Speaker 2

Gross profit margin was 82%. Adjusted EBITDA was $18,000,000 or 22% of net sales in the quarter, representing an increase of $600,000 over the prior year period. I want to acknowledge the team for their outstanding work as we rapidly adjusted our operating cost structure in light of the challenges we are facing. As a result, we were able to maintain a healthy operating margin. We ended with $89,000,000 in cash, an increase of $20,000,000 in the quarter.

Speaker 2

This too warrants a call out. As a result of our debt refinancing earlier in the year and ongoing cash accumulation, we have gone from incurring net interest expense of $1,700,000 in Q3 of last year to earning net interest income of close to $300,000 this year or a nearly $2,000,000 per quarter positive cash swing, which will help fund future growth initiatives. We continue with the market release of Heliogen, which is the commercial name for the bovine derived particulate we acquired earlier in the year. We met with CMS, the MAX and numerous congressional offices during the quarter to seek needed reimbursement reform in the private office and adjacent care settings. It is clear they share our concerns and are working on corrective action.

Speaker 2

And last, you may have read an excellent article about the benefits of placental tissue that was published by The New York Times on October 10. The amazing benefits of our products were on full display. While MiMedx was not mentioned in the article by name, we were a major contributor to the piece and we're happy to help educate the public on the incredible and vast Chilean properties of our products. Turning now to our strategic priorities. As outlined on prior calls, our plan is focused in 3 areas.

Speaker 2

1st, we will continue to innovate and diversify our product portfolio. As discussed, the company has done an excellent job developing and commercializing unique product configurations designed to meet explicit customer needs. We have introduced 4 new products in the last 2 years alone. The first three received widespread market acceptance, while our most recent product, Heliogen, is currently in its initial market release phase. Amneoeffect continues to do well, growing at 29% year over year in the surgical market.

Speaker 2

And Epieffect, which we launched late last year, continued to show significant strength in the private office. Both products have received excellent physician feedback as they have become integral parts of their care protocols. Additionally, we continue to make progress building our Epifix business in Japan, which posted another quarter of exceptionally high growth. We now have nearly 800 physicians trained and are in over 140 accounts with top decile customers ordering routinely. End user sales for 2024 will likely grow nearly 3 fold from 2023.

Speaker 2

We sometimes get the question, why isn't this business growing even more rapidly given the quality of the product? As a reminder, it is first of its kind in Japan and it is a premium price product to the standard of care. It's also important to understand that physicians in Japan will take into consideration the patient's co pay when selecting treatment. Building on the success of these recent product introductions, we expect similar performance as we move towards full market release of Heliogen, our first xenograft. We are making good progress working through the mechanics of the early launch phase like the value analysis process and the product is successfully being applied in various surgical procedures.

Speaker 2

We expect Heliogen to be a meaningful contributor in 2025. Our second priority is to develop and deploy programs intended to expand our footprint in the surgical market. In order to achieve this objective, we have made a significant commitment to the production of real world evidence and scientific research. We now have multiple studies in flight, which were designed to demonstrate support for the use of our placental drug allografts in a variety of surgical procedures. On last quarter's call, I highlighted our recent publication in Nature Scientific Reports, which continues to receive very positive feedback.

Speaker 2

As a reminder, this study found that the use of Mymetix's proprietary placental based allografts may function to interrupt pathological fibrosis and restore tissue homeostasis. The potential for reduced scarring or adhesion formation through the use of Imetix's proprietary technology could enable accelerated and improved quality of healing, leading to enhanced surgical outcome from improved functionality to superior cosmetic results. Again, coupling these potential benefits with the tens of millions of surgeries performed in the U. S. Each year, we believe the market opportunity could be massive over time.

Speaker 2

On the heels of the Nature publication, we were asked to contribute to the article which appeared on the front page of The New York Times on October 10. The headline read, Her Face Was Unrecognizable After an Explosion, A Placenta Restored It. While highlighting the many benefits of placenta autographs for a variety of wound care and surgical procedures, The article chronicled the real world healing journeys of 2 individuals who had tremendous outcomes with MiMedx products. This was an excellent general awareness piece with contributions from several clinicians who were using placental tissue in a variety of ways. As the article states, Research has found placental derived grafts can reduce pain and inflammation, heal burns, prevent the formation of scar tissue and adhesions around surgical sites and even restore vision.

Speaker 2

All of this is to say, we are likely still in the very early market development phase for placental derived products. In addition to research and awareness, it is critical that we continue to expand our product and service offering in order to build a stronger presence in the surgical environment. Our third initiative is to introduce programs designed to enhance customer intimacy. As a reminder, the primary focus of this initiative is to develop programs which improve relationships and ultimately lower our customer churn. To strengthen the connection with our customers, we have undertaken a variety of initiatives aimed at institutionalizing customer centric behavior.

Speaker 2

We continue to experience excellent adoption of Mymetics Connect, our new customer portal, which provides a streamlined digital connection with our referring practices to perform functions such as insurance verification and product ordering. We are actively developing additional features designed to improve customer workflow and strengthen the bond between MiMedx and our customers. We have begun executive customer feedback sessions around the country and are developing a comprehensive set of programs to embed a customer centric mindset across the enterprise. Our commitment to this approach will lead to enhanced customer relationships, improved net promoter scores, higher margins and ultimately an increase in the average lifetime value of a customer. Now let me turn the call over to Doug for more detail on our financial results.

Speaker 2

Then I will close with comments about the private office reimbursement dynamic and full year guidance. Doug?

Speaker 3

Thank you, Joe, and good afternoon to everyone on today's call. Thank you for joining us. I'm pleased to once again share our results with you all today. 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 that provide more detail regarding the adjustments made to calculate our non GAAP metrics.

Speaker 3

I encourage you to review these materials alongside my comments today. As a reminder, unless otherwise noted, my discussion is on a continuing operations basis. For full discussions of the impact of our discontinued operations, please refer to our most recent 10 ks and 10 Q filings. Moving on to the results. Our Q3 2024 net sales of $84,000,000 represented 3% growth compared to the prior year period.

Speaker 3

As Joe mentioned in his remarks, this performance against the tough growth comparison in the prior year was marked by exceptional resilience and execution of our commercial team. By product category, 3rd quarter wound sales of $55,000,000 grew 8% versus the prior year period, while surgical sales of $29,000,000 were down 5% as reported. Excluding the impacts of Axiophil and the sales of our dental product that were discontinued in the prior year period, our surgical sales increased 5%. Across these product categories, 2 of the standout contributors in the quarter were our AmneoEffect and EpiEffect products, along with initial, albeit modest, contributions from Heliogen, our new xenograft product for surgical. And finally, turning to our results by site of service.

Speaker 3

Net sales growth in the private office grew 11% to about $25,000,000 compared to the prior year quarter. Despite the ongoing challenges in the environment related to high priced skin substitutes for Medicare fee for service patients, sales of EPIFX remained strong and our industry leading commercial payer coverage continues to help us grow in this care setting. 3rd quarter net sales in the hospital channel declined 3% compared to the prior year quarter to $46,000,000 largely due to the disruption created by the higher than expected employee churn we experienced in the 2nd quarter and to a lesser degree, year over year declines in sales of Axiophil in the quarter. The hospital setting and expanding our footprint in surgical disciplines broadly remains a priority for the company moving forward as we invest in generating a strong evidence base for use of our products in a wide range of categories. Finally, 3rd quarter net sales in other, which includes international, federal and other care settings, grew about 9% to nearly $12,500,000 This growth was driven by a strong performance in our international business.

Speaker 3

In fact, our Q3 represented the highest level of international mesh sales we have seen in many years. Our Q3 2024 gross profit was about $69,000,000 compared to $67,000,000 last year. Our gross margin was 82% in both periods as well. Excluding the incremental amortization expense from intangible assets acquired in our Heliogen transaction of roughly $400,000 in the quarter, our gross margins were up 30 basis points compared to the Q3 of 2023. Turning to our operating expenses.

Speaker 3

Selling, general and administrative expenses or SG and A were $54,000,000 in the Q3 compared to $53,000,000 in the prior year period. The increase in SG and A was primarily related to a variety of higher commercial expenses, including commissions, costs associated with the Heliogen launch and increased other costs, including legal fees in the quarter compared to the prior year period. Our 3rd quarter R and D expenses were $3,000,000 or about 3% of net sales, roughly flat when compared to the prior year period. Income tax expense for Q3 2024 was around $4,000,000 reflecting an effective tax rate of 31%. Although slightly higher for the quarter, we continue to expect our long term non GAAP expected effective tax rate to be about 25% going forward.

Speaker 3

Our 3rd quarter GAAP net income inclusive of the results of our discontinued operations was $8,000,000 down slightly compared to the prior year period. Adjusted net income for the quarter was $10,000,000 or $0.07 per share compared to $8,000,000 or $0.05 per share in the prior year period. Q3 2024 adjusted EBITDA was $18,000,000 or 22 percent of net sales, roughly flat in dollars and as a percent of net sales compared to the prior year period. Turning to our liquidity. Despite this period of slower top line growth, our expense discipline has allowed us to continue to demonstrate sizable free cash flow generation, which strengthens our balance sheet and provides us with a great deal of optionality to fund the business organically and inorganically in the future.

Speaker 3

During the quarter, we generated free cash flow of $19,000,000 a $7,000,000 increase over the same period in 2023. In turn, our net cash balance is now at about $70,000,000 up from $50,000,000 just last quarter and more than double our net cash position at the end of the Q3 last year. I will now turn the call back to Joe. Joe?

Speaker 2

Thanks, Doug. As you have just heard, we had another solid quarter. Net sales were $84,000,000 up 3% in the quarter and in line with the expectations we highlighted last quarter. Gross profit margin was 82%. Adjusted EBITDA was $18,000,000 or 22% of net sales in the quarter.

Speaker 2

We added another $20,000,000 of cash. We continued to build in the market release of HelioGen, our first xenograft product, and we continue to invest in and support research designed to validate the use of our products in various applications. Let me now revisit the reimbursement saga in the private office and adjacent care settings, a topic which has dominated the chatter in the industry and has caused massive abuse of the Medicare Trust Fund as well as disruption and dislocation in the market. If you have been following the story, you know that multiple bad actors are using intricate schemes and unethical business practices to exploit a relatively loose regulatory and reimbursement environment for Medicare claimant of placental derived advanced skin substitutes. While I remain frustrated that this behavior has been allowed to persist for so long, I now have renewed hope that a fix is on the horizon based on our recent interactions with CMS, the MAX and congressional staff.

Speaker 2

Last quarter, I shared that CMS payments for skin substitutes increased from approximately $1,500,000,000 in 2022 to $4,000,000,000 in 2023, and that we were anticipating the spend decline even higher given the rate at which these improper business practices have been metastasizing. It turns out that our concern was spot on. We recently learned that the CMS spend for skin substitutes in the private office and associated care settings is now running at a rate north of $1,000,000,000 per month. Let that number sink in for a minute. The total annual spend was closer to $500,000,000 5 years ago.

Speaker 2

Medicare is now paying that amount every 2 weeks. Keep in mind, it is not like some expensive new breakthrough technology has drastically changed patient care driving spend up. The only thing that has changed is the way certain companies are gaming the system. Given the magnitude of the problem and the rate at which it is escalating, it has caught the attention of both Congress and CMS. Based on these facts and our read of conversations with government officials, we believe the question is no longer if, but when and in what form a correction will take place.

Speaker 2

We now believe the most likely scenario is that the LCDs will be implemented in a somewhat modified format from what has been proposed, with the pricing methodology to be addressed shortly thereafter. The government has also ramped up enforcement, and we should expect that to continue and grow. As we have shared, we continue to have a fair amount of success minimizing the disruption to our business caused by these unethical business practices. The commercial team has done an excellent job weathering the storm given the host of challenges thrown at them. To that end, I am pleased to report we are taking up the bottom of our full year revenue growth rate guidance from mid to high single digits as discussed on last quarter's call to just the high single digits.

Speaker 2

We also expect our full year adjusted EBITDA margin to be above 20%. This assumes the LCDs are not implemented in Q4, is a reasonable expectation at this point. Again, we see the implementation ultimately as a net positive for MiMedx. But until CMS provides a definitive path forward, we have to plan for continued disruption. Obviously, we will continue to revisit expectations as we learn more.

Speaker 2

Importantly, our excitement about the long term prospects for the business remain high. Post the reimbursement correction, we anticipate resetting top line growth to the low double digits with a strong adjusted EBITDA margin profile above 20%. In closing, I'm very proud of my colleagues and would like to again thank the entire group of extremely dedicated professionals here at Mymetix, who remain committed to delivering for the thousands of people who rely on our products each and every day. With that, I would like to open the call to questions. Operator, we are now ready for our first question.

Speaker 2

Please proceed.

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Chase Knickerbocker with Craig Hallum Group. Please proceed with your question.

Speaker 4

Good afternoon, guys. Thanks for taking the questions. I'm going to start, I guess, unsurprisingly on kind of the reimbursement dynamics here. So you kind of spoke to the confidence that you guys have that changes indeed coming, which I think really is kind of a change in tone from a standpoint of kind of that confidence level. And I think just my question specifically on the LCDs, kind of in those conversations that have given you incremental confidence, kind of what's that confidence level at the LCDs, you had said slightly changed, are still in a format and of a certain structure that does solve this high ASP kind of loophole problem that is in the market in the near term, where this isn't something where we're waiting until January 1, 2026

Speaker 2

for a solution? Thanks. Yes. Chase, the big difference is what we learned over the quarter, that's kind of what's driving our change in tone and our more bullish attitude towards a pending correction. We've met with CMS on multiple occasions.

Speaker 2

We've met with Max. We've met with multiple congressional staffers. And even throughout the quarter, we could see that the storyline evolving when we met with various stakeholders. There is an incredible sense of urgency to get some correction in place given the spend level and the rate at which the spend is escalating. As you know, they can't tell us specifically as industry participants what they're going to do and when they're going to do it.

Speaker 2

But our read on the situation is they're spending an awful lot of time on it and it has gotten everybody's attention. So yes, I am more confident as I sit here this quarter versus last quarter that there is change coming. I don't know exactly how the LCDs will be modified, but I do believe that they will be implemented in some way, shape or form. And the reason I believe that is not because anyone is telling me it's coming is because it's the mechanism they have at their disposal to address this problem and everybody agrees that they need to address the problem.

Speaker 5

Got it. Thanks.

Speaker 4

Maybe shifting gears over to the surgical business. Can you kind of help us quantify the majority of kind of that impact year over year, the shortfall from dental and Axiofill? Was it Axiofill? And then how quickly do you think you can fill that hole with Heliogen from here? And kind of do you have any kind of early kind of how are you monitoring success early in the launch of Heliogen there with your reps?

Speaker 3

Chase, this is Doug. Just from a numerical perspective, pro form a without last year's dental and without neutralizing for axial fill is about a 10 point swing. So we go from surgical being around negative 5% to a grower of 5% in Q3. That's the relative impact of those items. And with regards to HeliGen, we launched in Q3 and it's off to a really good start.

Speaker 3

I'll let Joe provide more color there.

Speaker 2

Yes. We're on track where we expected to be at this point. I think that's an important point. Working through the early phase mechanics like getting through value analysis, which could take quite some time depending on the institution. You have to get a sponsor within the organization to represent you as you go to value analysis.

Speaker 2

And then you have to get yourself on the agenda and then you have to get it through value analysis. So those things could take a while and so you have to work through cycles. The good news there is we're getting very positive feedback as we work through that process. Also, clinicians who are using the product in various case studies are getting great outcomes and tremendous feedback. So it will take a little while to soften the beach and build momentum for the product.

Speaker 2

But we're pretty confident that this thing is going to be a well received product like the other products we launched over the last 2 years. So the other thing I would just add to what Doug said about the axial fill number. We highlighted excuse me, the surgical number, we highlighted the fact that we no longer have dental and we were sort of neutralizing the Axiophill portion of this. But there was some disruption in the business with turnover that we had highlighted on the last call. So I don't want to kind of be dismissive of that.

Speaker 2

There was disruption in certain parts of our commercial organization in certain parts of the country, and we're addressing that. And the good news is those positions have been filled rapidly. We did it I think the commercial team did an excellent job recruiting very experienced people from all different parts of health care, And we're already starting to see those new folks get in and gain some traction. So I didn't want to leave that part out. Yes.

Speaker 2

Chase, one other thing, just

Speaker 1

as you're kind of ticking in time, we talked about the dental impact. You'll recall last Q3 was sort of last time buy for that product. So it's about $1,400,000 in the quarter. So that hopefully helps you with the math.

Speaker 4

Yes, great. And you had said, Joe, you expect material contribution from Heliogen in 2025. I mean, do you think it can fully kind of do you think Heliogen can be at, say, 2023 kind of axial fill levels next year, kind of fill in the gap in that product? And then just last for me, I would have also expected that sales rep turnover to really impact the physician office as well and much better growth there than we had anticipated. Can you just give us some additional detail?

Speaker 4

Is that largely driven from Epi effect? Just kind of how you kind of outperformed our expectations in that market segment this quarter? Thanks.

Speaker 2

Yes, definitely have the effect, especially in regions that weren't impacted by the churn in the sales organization. So much doing very well with that product. What the other part of your question? I forgot already.

Speaker 4

Just on the like you had said material you expect Heligen to be a material contributor in 2025. Can it be at the 23 level of Axiophil, for example, to kind of fill that hole in 2025?

Speaker 2

Yes, it's tough to say right now. As you may recall, when we had a negative designation on Axiophil from FDA, we had kind of a multi pronged approach to how we would counter that. One would be we would dispute the finding that axial fill is not a Section 3 61 product. We would launch a product like Heliogen, that's a genogram 510 regulatory pathway, which we have done. And then 3rd, we would pursue a 510 on an axial fill like product.

Speaker 2

And we have started that process. We just completed our pre sub meeting with the agency. So that will continue. I think the Heliogen, from what we're hearing, definitely can be a backfill for a portion of the Axiophill usage, probably not 100% of it. So it's hard for me to say, yes, gee, we're going to do everything that Axiophill did.

Speaker 2

It might just take a little bit of time. But the good news is we're getting excellent feedback on the product.

Speaker 4

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Ross Osborne with Cantor Fitzgerald. Please proceed with your question.

Speaker 6

Hi, guys. Thanks for taking our questions. Starting off, you had a decent cut to SG and A sequentially. Is this a new base to go off of? Or should we expect some more cuts in the Q4 and start to 'twenty five?

Speaker 3

Ross, this is Doug. SG and A remained fairly consistent from Q2 to Q3, and I would expect it to sort of stay on that zip code

Speaker 2

in the near term.

Speaker 6

Okay. Got it. And then, could you just remind us of some of your manufacturing initiatives and where those stand?

Speaker 2

Well, I don't know that we're highlighting any specific manufacturing initiatives. We've talked about just general expense discipline across the board, and we spent a lot of time talking about that last year. There was a fair amount of process improvement work that was implemented in operations. We cut in some laser technology. A majority of that has been implemented.

Speaker 2

But I would say that the team has kind of a more of a culture of ongoing process improvement that will always be looking to lean out the cost structure where there are opportunities to do so. I can't point to any major initiative that I would want to highlight with you. But I would just say, in general, the institutionalizing and discipline of operational cost control, I think the team has done a very good job of achieving that.

Speaker 6

Okay, got it. Congrats on progress and thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Anthony Petrone with Mizuho Securities. Please proceed with your question.

Speaker 5

Hi, guys. We have Brad Bowers on for Anthony today. I appreciate you taking our questions. I'm going to jump on a few topics here, but just kind of I guess staying on the P and L. I kind of expected an R and D step up maybe in the back half of the year.

Speaker 5

It sounded like there was some RCT initiatives. I just wanted to kind of hear if there were any projects that were either pushed out or canceled or how we should think about R and D progression here? And maybe just extrapolating a bit, is there anything that you had heard from CMS that some of the additional studies weren't needed? I just know that some of the data was that was kind of why some of the products were taken off some of the CMS list. So just want to make sure that everything is kind of being taken care of to what CMS wants to kind of stay on their good side?

Speaker 2

We're not doing anything from CMS. The studies like this are not going to be needed, and we do have a major RCT in flight for APPE effect. I think it's fair to say that that's sliding a little bit. There's competition to get these studies enrolled. We feel really good about where we are.

Speaker 2

Enrollment is underway. We have all sites selected. But it's probably fair to say that some of that spend will manifest itself more in the Q4 and Q1 of next year. But we don't expect R and D as a percent of revenue to materially change over time. Yes, we have to run these studies.

Speaker 2

But frankly, we've always run studies and we have multiple studies in flight at any given time, maybe not to the magnitude of spend that is required for an RCT. But I don't think it's going to material change. Doug, do you want to add anything?

Speaker 3

I would say just over the next several quarters, you could expect some of these things to ramp up from a half a point maybe all the way up to a point and a half by the end of next year is the relative level of increased investment in the R and D line.

Speaker 5

Great. And maybe touching on kind of margin outlook, I appreciate you guys given some of the puts and takes here for 2025 and totally understand not guiding there yet. But just thought it was interesting that your outlook for this year as well as your outlook for out years both call for adjusted EBITDA margin above 20%. Obviously, already there right now, which is impressive in and of itself, but just wanted to kind of hear about how we should think about cadence and further progression and kind of one of the drivers of that. Is it something like a revenue uplift that will get maybe the next leg or if there's other low hanging fruit?

Speaker 3

It's a good question. I think we're built to scale. I think the more we sell, the more we're going to leverage the bottom line. And that with the way our gross margin as well as our EBITDA margin is structured, it gives us a lot of optionality on kind of when and how and where to invest in the business versus drive leverage. And so we're always looking for the right places to invest, but at 20 plus percent, we feel good about our cash flow and liquidity and ability to invest both organically and inorganically.

Speaker 2

Yes. My experience running medtech businesses of this size, I'm always pleasantly surprised at the amount of margin accretion or leverage you get the scale. And so the fact that we started to see it so soon is a really positive sign. So I can't peg a number for you, but I would expect margin accretion to scale.

Speaker 5

That's great. And if I could get a last one in here, you mentioned inorganic. I know Heliogen was one of those inorganic opportunities. So just wanted to maybe give you an opportunity to hear about just what the sales force experience has been with Heliogen, kind of the first foray into xenograft. I know that we had talked in the past about this may have been a product that was the customers were kind of asking for.

Speaker 5

So just wanted to kind of hear about how this product has maybe opened any doors or if there's any flow through to some of the other products and really just how the launch is going? And thanks again for the question.

Speaker 2

Yes, absolutely. I think it will open up doors, right? It's a product that's using a slightly different procedures. I was personally with customers a few weeks ago and I know this is anecdotal, but had several physicians just raving about the effectiveness of the product and how they're starting to use the product. So I think it's just working through the process, getting through value analysis, getting the product

Speaker 3

through pricing

Speaker 2

and then having more awareness built in various parts of the market. But we're pretty pleased with where we are with it.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Carl Byrnes with Northland Capital Markets. Please proceed with your question.

Speaker 3

Thanks for the question and congratulations on the results. Just out of curiosity, going back to reimbursement and given the sense of urgency around CMS and the LCDs, do you think that there's any potential that there would be an adoption of reimbursement on a square centimeter basis? And then I

Speaker 2

have a follow-up as well. Thanks. Yes, I don't know. I can tell you that several industry participants, including us, have recommended a new pricing methodology very similar to what you just stated, a price per square centimeter. And I'm hopeful that CMS is taking that under consideration.

Speaker 2

Likely that would not manifest itself until next year's new proposed physician fee schedule. As you may recall, these are typically proposed in July and final schedules are published around about now, early November is the typical timeframe implemented in January. So because we're mid cycle and nothing has been proposed, which means people didn't have a chance to comment on it, we're likely not going to see anything in the follow-up. So a change like that will probably at earliest take place sometime next year. We have recommended it.

Speaker 2

We're hopeful we think it's a more sound way to price these products. One thing is for sure, they have to come off this ASP methodology. The fact that these products are too easy to bring to market under Section 361, Q codes are way too easy to get issued and then you get to set your own price, They are the factors that have contributed to the mayhem that we're now experiencing in the marketplace. I don't know, bizarre set of circumstances, super low barrier to entry to get to set your own price. So what could possibly have gone wrong?

Speaker 2

We're looking at it. But I am very hopeful, Carl, that that is the case. Great. That's helpful. And then just

Speaker 3

a quick follow-up. Out of curiosity, how does the HeloGen launch differ from other product launches in the segment or similar? I mean, whatever you can add there would be very helpful. Thanks so much.

Speaker 2

I would say it's very similar to the way we roll out products in the surgical environment in the past, right. It's a process, it takes time to work your way through.

Speaker 1

Yes, Karl, the only thing I'd maybe add is that relative to going into, say, a wound care center, a physician office setting, right, you do have to go through the value analysis committee and data does maybe hold a bit of a higher bar. So you got to go through that process on a hospital by hospital basis. So as Joe said, the early results are super positive and encouraging with the clinicians who can then hopefully some of them become champions of the product to help us really start to see that inflection point in adoption.

Speaker 2

Yes. Another nice benefit to that acquisition was we were able to establish a relationship with Virginity, the manufacturer of the product. So we already have a development agreement in place for them and have already identified additional products we would like them to develop that we would ultimately commercialize. So a lot of benefits coming from that, albeit relatively small acquisition.

Speaker 3

Great. Thanks. And congratulations again.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.

Speaker 6

Hey, good afternoon, guys. This is Aaron on the line for Brooks. Thanks for taking our questions. Most of them have been addressed already. I'm just sort of curious on how Mymetis Connect has sort of developed since last quarter.

Speaker 6

I know you sort of mentioned a little bit in your prepared remarks, but maybe any additional details there or just anything additional that you're planning in the future would be very helpful. Thanks guys.

Speaker 2

I would just say adoption continues to increase at a rate above what we had anticipated. Feedback from customers are that it is a major enhancement to workflow within their practices. So that's excellent to hear. And then based on customer feedback, we are developing additional capabilities to integrate into the platform. Concept here being the more we can do for them, the more we become part of their workflow, the more difficult it is to replace us, right?

Speaker 2

That's just logical that we're trying to create more value with our overall service offering. Nothing specific in terms of capabilities that I can highlight for you today, but just in general, we have a lot in the queue. Great.

Operator

There are no further questions at this time. I'd like to turn the call back over to Joe for closing comments.

Speaker 2

Thanks, operator. I appreciate you all being on the call today and appreciate your interest in the company. We're going to go ahead and call that a wrap. That concludes today's call. We will talk to you at the end of our next quarter.

Speaker 2

Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
MiMedx Group Q3 2024
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