MiMedx Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Mymetix Group, Inc. 4th Quarter and Full Year 2023 Operating and Financial Results As a reminder, this conference is being recorded. It is now my pleasure to introduce Matt Notariani, Head of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to the Mymetix 4th quarter and full year 2023 operating and financial results conference call. With me on today's call are Chief Executive Officer, Joe Capper and Chief Financial Officer, Doug Rice.

Speaker 2

As part of today's webcast, we

Speaker 1

are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations website at mymedix.com. Joe will kick us off with some opening remarks and Doug will provide a summary of our operating highlights and financial results for the quarter, 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, EBITDA, free cash flow and cash balance growth, future margins and expenses and expected market sizes for our products.

Speaker 1

These expectations are subject to risks and uncertainties and actual results may differ materially from those anticipated due to many factors. Actual results and market sizes will depend on a number of factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays and other factors. Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our Annual Report on Form 10 ks. 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.mymedix.com. With that, I'm now pleased to turn the call over to Joe Capper.

Speaker 1

Joe?

Speaker 2

Thanks, Matt, and good afternoon, everyone. Thank you all for joining us on today's call. I am very pleased to report that we had another outstanding quarterly performance in Q4, closing out an excellent 2023. Revenue for the full year grew by 20%, surpassing our guidance. As you will hear, the company continues to perform at an extremely high level in all facets of the business.

Speaker 2

When I joined Mymetix just over a year ago, I stated that our mission was to transform the company into a highly focused, growth oriented, profitable medtech business. In order to achieve that goal, we needed to make a significant strategic pivot, restructure parts of the business, rationalize expenses and drive productivity improvements. I am delighted to report that our exceptional leadership team delivered on this challenging vision for MiMedx. The pivot was fairly rapid and no small feat. As a result, we have made a dramatic improvement to our financial profile.

Speaker 2

I believe when we look back at 2023 in a few years, it will prove to be the seminal year the company established a strong foundation, which was built upon for years to come. I have great confidence in the talented people I am fortunate to work with each day and believe we are just getting started towards capitalizing on the many opportunities before us. While we are pleased with the progress we made in 2023, we entered the new year clear eyed that much work remains as we pursue our strategic objectives. More on the long term growth plans in a bit. First, I'd like to touch on a handful of the more noteworthy accomplishments for the quarter and full year.

Speaker 2

Q4 net sales grew year over year by approximately 17% to $87,000,000 another outstanding growth quarter. Full year sales closed at $321,000,000 up 20% over the prior year. Gross profit margin improved to 84% in the quarter. Adjusted EBITDA was $21,000,000 or 24 percent of sales in the 4th quarter and $58,000,000 or 18% of sales for the full year, representing an increase of $51,000,000 over the prior year. We ended the year with $82,000,000 in cash.

Speaker 2

Our momentum continued with the successful commercial launch of EpiFX into the private office setting. And as a result of multiple improvements we made to the business over the course of the year, we began 2024 with a far more attractive balance sheet than we had a year ago. To expand on this point, there are really 3 primary aspects that drove improvement. 1st, our focus on operational efficiency and building a culture of expense management discipline combined with the accelerated growth of the business led to improved cash flow generation and an increase in our cash balance throughout the course of the year. Next, the company's consistent performance led to our stock price trading at a level high enough to trigger an automatic conversion of the Series B convertible preferred stock into the company's common stock just prior to the close of the 4th quarter.

Speaker 2

As a result of this conversion, approximately 30,000,000 shares of common stock have been added to the company's fully diluted share count. In addition to simplifying our balance sheet, the conversion ends with the dividend accrual associated with the preferred stock. And last, in January, we put in place a new debt facility, refinancing a previous note at a far more competitive rate and providing us with borrowing capacity to support growth initiatives. The new debt was obtained through a syndicate of banks comprised of Citizens and Bank of America, 2 high quality institutions familiar with the company and our market. Remarkably, the combined benefit of interest being received on much higher cash deposits and the lower rate to service the new facility has nearly eliminated an annual cash outlay of over $6,500,000 of net interest expense the company was burdened with during 2023.

Speaker 2

Turning now to a progress check on the 3 primary growth drivers we have been laser focused on for the past year in order to drive our success. Our highest priority is to continue to build on our leadership position in the wound and surgical markets by enhancing our product portfolio and expanding geographically. For the Q4, this focus again produced growth in all sites of service. Sales grew by 8% over the prior year in the hospital sector, which continues to benefit from the products we introduced late in 2022. We continue to invest in clinical research and are in the process of adding additional resources to our medical affairs team.

Speaker 2

We believe these investments are essential to support further penetration into the surgical suite, which is a focus for the company. Our 4th quarter sales in the private office setting grew 24%. This was a sequential acceleration driven primarily by 2 factors. 1st, as you may recall, Q3 was marked by confusion associated with an ill fated attempt to introduce new local coverage determinations or LCDs for skin substitutes by 3 of the Medicare Administrative 2nd, we moved into the commercial launch phase of EpiFX, the newest addition to our Advanced Wound Care Solutions product portfolio for use in the private office market. As a reminder, EpiFX offers a thick tri layer configuration of amnion, hulion and intermediate layers with handling characteristics and product attributes that make it a preferable treatment option for deep tunneling wounds or cases where securing the glab in place with sutures is desired.

Speaker 2

We are excited to get this product launch underway and remain committed to organic product development and innovation in our market leading placental drive technology as we see this as an important component of our future growth. We also continue to make progress developing our Japanese business as we experienced another nice uptick in revenue during the Q4. Reflecting on the year, we accomplished a great deal in terms of foundation building in this country. We have trained over 500 physicians, including all of the key opinion leaders, many of whom are now routine users of Epifix. We are in 70 accounts, including all of the top wound care hospitals.

Speaker 2

We established reimbursement and we have enrolled more than a third of the patients for post market surveillance study. Sales are accelerating nicely, making us optimistic about 2024 and beyond. Our next priority is develop opportunities in adjacent markets to create additional growth drivers for the company. During the quarter, we continued work internally and externally on options to expand our skin substitute portfolio beyond amniotic tissue to include xenografts and or synthetics. Notwithstanding the superior handling qualities of our placental derived allografts, we see increasing the breadth of our offering as the most advantageous way to improve our addressable market opportunity as it open up segments of the market where it is difficult, if not impossible, for us to compete today.

Speaker 2

We believe this approach will be highly complementary to our current business, allowing us to leverage our entire commercial infrastructure. During the last few quarters, we have spent a fair amount of time evaluating a variety of products and potential relationships that may allow us to accelerate the establishment of this growth driver. We hope to have something to discuss with you in more detail in the near future. And finally, our last objective has been to build a corporate discipline around expense management, rationalization and continuous process improvement. Efforts in this area led to the much improved margins we realized as the year progressed, culminating in a Q4 gross margin of 84% and an adjusted EBITDA margin of 24%.

Speaker 2

If you would ask me earlier in 20 23 if we could get the adjusted EBITDA margin to this level in less than a year, I would have considered that highly unlikely given all of the things that would have had to fall in place to get that done. But the team's impressive execution even surprised me. I am truly impressed by how quickly they were able to maximize returns while still growing the business. During the Q4, the company again did an excellent job delivering on these three strategic objectives, and our results clearly demonstrate that to be the case. As I've mentioned on previous calls, we will continue to identify and execute against the most relevant growth drivers for our business in order to ensure we have sustained long term performance and create value for all DiaMedics stakeholders.

Speaker 2

Before I turn the call over to Doug, I want to provide commentary on Axiosil and our path forward. As you will recall, late in Q4, we announced the receipt of a warning letter from the FDA relating to the regulatory classification of Axiophil and only Axiophil. Specifically, the agency's position is that Axiophil does not meet the requirements as a Section 361 product and is therefore subject to enforcement as a Section 351 product. Prior to the receipt of the letter, we were in the midst of following the FDA's RFP or request for designation process on axial fill. We have since responded to the warning letter and expect the RFP process to culminate towards the end of Q1, at which point we will have more clarity on our path forward.

Speaker 2

At the heart of this issue is the agency's position that we are more than minimally manipulating tissue when we transform it into a particulate and as a result, the tissue can no longer be used for its intended purpose for homologous use. We disagree with this position when it comes to Axiophil and do not believe the FDA has been consistent in the treatment of other human derived particulates. Transforming the sheet into a particulate provides the physician increased flexibility when treating certain geometrically complex wounds. It is not intended to modify how the tissue functions and certainly does not somehow transform the product into a biologic drug, which is what Section 351 is in place to regulate. Axiophil is intended for homologous use by supplementing damaged or inadequate integumental tissue.

Speaker 2

As you can imagine, the situation slowed down the adoption of Axiophil, which is unfortunate given its impeccable safety profile and the patient benefit derived the product. Feedback from physician users of Axiophil has been excellent. We intend to exhaust all of our regulatory and legal options in an attempt to ensure continued access to this safe and effective product. However, it is important to note that revenue associated with the sale of Axiophil is not material for the company, and we believe we can replace some or all of it with other products if we can't reach an agreement with the FDA on the sale of our product. Now let me turn the call over to Doug for more detail on our financial results.

Speaker 2

Doug?

Speaker 3

Thank you, Joe, and good afternoon to everyone on today's call. Thank you for joining us. It's great to be able to report our strong Q4 and full year results with you all today. As a reminder, many of the financial measures covered in today's call are on a non GAAP basis, so please refer to today's earnings release for further information regarding our non GAAP reconciliations and disclosures. Additionally, during the Q4, we bifurcated our GAAP financial reporting to reflect the current and historical results of our recently disbanded Regenerative Medicine segment as discontinued operations.

Speaker 3

Accordingly, my comments today on our Q4 and full year 'twenty three results are made on a continuing operations basis and exclude the historical costs of the Regenerative Medicine business unit, which was disbanded beginning in late June 2023. For a full discussion of the impact of these discontinued operations, please refer to our 10 ks filing for the period ended December 31, 2023. Moving on to top line results. As Joe noted, our 4th quarter and full year 2023 net sales of $87,000,000 $321,000,000 represented 17% 20% growth compared to their respective prior year periods as we capped off a very strong end to the year. In the case of Q4, our 17% year over year growth rate was the 5th consecutive quarter of strong double digit growth we have seen and demonstrates the strong market adoption and a high level of commercial execution by our sales organization across each of our sites of service in the period.

Speaker 3

You'll recall we launched our latest addition to our post acute product portfolio at the effect at the beginning of the Q4 and began to see a nice uptake of the product in the physician office channel in the Q1 of the launch. We continue to see solid growth in the hospital channel and other sites of service even in the face of tougher comps as we anniversaried the impact of products launched in late 2022. Our Q4 2023 gross profit was about $73,000,000 compared to $60,000,000 last year. Our gross margin was 84%, reflecting a more than 300 basis point improvement from the Q4 of 2022. These improvements were due to a beneficial mix of product sales as well as a continuation of the trend that began in early 2023 with our quality, operations and regulatory teams' efforts to scale our manufacturing capabilities as efficiently as possible in order to keep up with the elevated demand levels we have seen for our products.

Speaker 3

Our team has certainly come a long way in improving our gross margin profile and reversing a trend of margin degradation we saw more than a year ago. Our focus moving forward is to maintain our gross margin percentage in the mid-80s over the long term with our current mix of products. Selling, general and administrative expenses or SG and A was $54,000,000 or 63% in the 4th quarter compared to $50,000,000 or 67% in the prior year period. Although improved on a relative basis due primarily to operating leverage, the increase in SG and A on a dollar basis was primarily a result of higher commissions we paid in the quarter due to our higher sales levels and increased stock based compensation expense, partially offset by our ongoing expense management efforts, which remain an ongoing priority of the company. Our 4th quarter R and D expenses were $2,000,000 compared to $3,000,000 in the prior year period.

Speaker 3

As we head into 2024 and beyond, our R and D team has a robust pipeline of potential products in various stages of development and additionally has been executing on a number of studies to build out the body of evidence for our

Speaker 1

product portfolio, including Epi Effek and also our other

Speaker 3

products used within specific surgical applications.

Speaker 1

One recent example of this would be

Speaker 3

the craniectomy paper that was published late last year. We believe the combination of our investments and innovation and our commitment to continue generating the largest body of peer reviewed evidence using our products will serve us well this year and beyond. Moving into 2024, I would expect our R and D spend to modestly increase on a relative basis to mid single digits. During the Q4, we recognized a roughly $37,000,000 income tax provision benefit, which primarily reflects the noncash reversal of a valuation allowance, which was previously recorded against substantially all of our deferred tax assets. This reversal reflects our positive operating results during 2023 in concert with the reevaluation of our historical results, excluding our discontinued operations.

Speaker 3

These deferred tax assets on the balance sheet will be utilized in the coming years to lower our cash tax liability. From a non GAAP perspective, our long term adjusted effective tax rate will continue to be 25%, which reflects our expected geographic footprint and operating model. As a result of this tax provision benefit, our 4th quarter GAAP net income, inclusive of the results of our discontinued operations, was $53,000,000 compared to a net loss of about $400,000 in the prior year period. 4th quarter 2023 adjusted EBITDA was $21,000,000 or 24 percent of net sales compared to an adjusted EBITDA of $7,000,000 or about 10% of net sales in the prior year period, which reflects both our top line success as well as the operating leverage areas that I previously mentioned. Turning to our liquidity.

Speaker 3

Our Q4 and full year 2023 cash and cash flow results reflect the meaningful improvements we have made in our financial profile. At the end of Q4, the company had $82,000,000 of cash, which exceeds our previously stated goal of ending the year above $80,000,000 considering the $9,500,000 share repurchase we executed with Hayfron in late October. Capital expenditures were $2,000,000 in 2023. However, we expect 2024 to be an investment year regarding our facilities and systems that will enable our growth. Accordingly, we expect 2024 capital expenditures to be higher.

Speaker 3

And finally, as Joe mentioned, in December January, we took steps to meaningfully strengthen and improve our balance sheet with the conversion of the Series B preferred stock and our long term debt refinancing. In light of the strong cash position and the strength of our continued cash flow generation, I am pleased to announce that earlier this week, we repaid the $30,000,000 outstanding revolving portion of our credit facility, leaving only the $20,000,000 term loan outstanding. We continue to have access to the $75,000,000 revolver availability should opportunities arise for us to deploy capital moving forward. And we are grateful to our lending partners, as Joe noted, Citizens Bank and Bank of America for the flexibility this new facility provides. To close out my remarks, on a full year basis, our 2023 results, which featured 20% growth on the top line, over 100 basis points of gross margin expansion, dollars 58,000,000 or 18% in adjusted EBITDA and free cash flow of nearly $25,000,000 were major achievements for this company.

Speaker 3

We believe we exit 2023 on solid financial footing, which combined with our top line momentum, expected cash flow generation and our recently refinanced balance sheet will enable our ability to take advantage of opportunities to strengthen and transform this company. I will now turn the call back to Jonny. Joe?

Speaker 2

Thanks, Doug. As you just heard, we had another outstanding quarter, once again exceeding expectations. Revenue was up 17% in the quarter and 20% for the full year. Gross profit margin increased to 84%. Adjusted EBITDA grew to $21,000,000 or 24% in the quarter.

Speaker 2

We continued to build cash and took other steps to improve our overall financial profile, then we moved into the full commercial launch of EpiFX. Over the course of 2023, we posted consistently improving performance, culminating with the strong Q4 results we've just highlighted. As we look to the horizon, we believe the company is very well positioned to build on this success. Naturally, our prior year comps will become increasingly challenging as we progress into 2024 after achieving such outstanding results last year. However, given our established momentum, we expect revenue growth percentage to be at least in the low double digits with an adjusted EBITDA margin above 20% for the full year 2024.

Speaker 2

Additionally, I fully expect that we will continue to execute our strategic plan and build a business capable of sustaining these growth rates for the foreseeable future. In closing, I would like to thank and congratulate the entire MiMedx team for putting an exclamation point on 2023 by closing out the Q4 in grand fashion. Throughout this past year, we took several crucial steps necessary to commence the transformation of MiMedx into a truly exceptional company that is the benchmark for our industry. Much work remains, but one cannot deny the meaningful progress made to date. Most importantly, our team is proud of the positive impact we make in the lives of countless people struggling with chronic and acute wound healing.

Speaker 2

We never lose sight of that mission and it motivates us every day to strive for excellence. I look forward to continuing to work together as we enter this next chapter of our story. With that, I would like to open the call to questions. Operator, we are now ready for our first question. Please proceed.

Operator

Thank you. Our first question comes from the line of Chase Knickerbocker with Craig Hallum. Please proceed with your question.

Speaker 4

Good afternoon, guys. Congrats on the great quarter and thanks for taking the question. First, if we take a look at the 23% physician office growth in the quarter, can you give me a sense of what portion of this growth was from EPI effect? And then as we turn into 2024, do you think tailwind that you mentioned from the confusion around the LCD is kind of sustainable in the way that you can kind of hold on to that volume that you've gained in the confusion in the back half of the year here?

Speaker 3

Hey, Tal. This is Doug. I'll start and Joe can provide color. But Q4 was we grew at all sites of care. We're super excited about this continued execution.

Speaker 3

I would say that while we're not going to give numbers on EpiFX, we certainly enjoyed the launch and strong physician adoption of Epi Effect. We also saw Amne Effect continue to grow a year after its launch. So we continue to capture share and also enjoy the market position that we're in with the market growth that we're experiencing.

Speaker 2

Yes. It's tough to bifurcate, right, between how much of it was tailwind associated with the LCD noise settling down into kind of converting back to more routine ordering patterns versus the lift we got out of Epi effect. We don't typically publish revenue by product SKU. But I would say that think about the amount of momentum we had in the private office setting throughout the course of the year. So a lot of that was just sort of a shift in dynamics in that marketplaces or in that portion of the market as CMS started to crack down on some of the behavior.

Speaker 2

Later in the year, we had the proposed LCD that created some disruption and that settled down as well. But those types of growth rates were pretty consistent for us throughout the course of the year, Chase. So it was we had pretty good momentum and tailwinds all year in that setting.

Speaker 4

Great. Yes. And then that kind of leads into my next question. I mean, if we think about that core growth opportunity that you just kind of briefly mentioned there with kind of just more companies reporting ASPs in the private office and kind of playing field leveling, where do you think we're at in that kind of growth in that growth opportunity from a standpoint of all the companies reporting ASPs? Are we still halfway through?

Speaker 4

And I ask, are those kind of growth rates that we've seen in 'twenty three kind of sustainable into 2024 in the private office?

Speaker 2

I would think that we probably still have growth rates like that private office in the 1st part of the year. A lot of that's going to be associated frankly with the continued rollout of EpiFX. The movement from as companies register more of their products on the CMS ASP price list, hard to say whether that's something that's outside of our control and really it's a behavior or a trend we would like to see continue. But it was a pretty big movement over the course of of the last year. So hard to predict how much more of a movement we would have.

Speaker 2

Matt, you got anything on that?

Speaker 1

Yes. I mean, Chase, I think the only other thing maybe to think about is there's probably, I rough numbers 80 or so SKUs that are now on the ASP list. We know from obviously the LCDs and some of the other published documents out there that there are probably about 200 or so SKUs in the category. So not quite halfway there, but with each quarter, quarterly refresh the ASP list, you're seeing 5, 6, 7, 8 get added each time.

Speaker 4

Great. Yes, that's helpful. Maybe just last for me, one for you, Joe, and one for Doug. Any additional commentary from any sort of engagement you've had with CMS after that LCD got scrapped about any kind of future changes to reimbursement in the market? And then Doug, just on the EBITDA guidance for 2024, to make the year more look more towards kind of the 20% EBITDA margin kind of range, it looks like you've got a model of pretty decent pickup in SG and A.

Speaker 4

Maybe just talk me through what you expect from SG and A growth in the year?

Speaker 2

So mine is kind of easy because we frankly, we don't really know, Chase, what's going to happen. As you know, there's been a lot of talk about CNS doing something to address the cost in this category, all the way from bundling to enacting some sort of in between measure like they attempted to do in the second half last year. So we're not really sure. I think the message though for you should be regardless of the outcome, we're probably better positioned than most people, if not all of our competitors in that setting. We have not played the LCD game.

Speaker 2

We just never had that approach to the market where we tried to maximize return and maximize price by gaining 1 payer channel versus another or payer option versus another, I should say. So I think we're fairly well positioned and we've run sensitivity analysis on worst case scenarios if this is bundled and we think we're in a pretty good position. Frankly, stability in that particular setting would be welcomed, in my opinion, regardless of the near term disruption it may cause.

Speaker 3

And then, Chase, with regards to EBITDA in 2024, we were certainly pleased with the way that we exited the back half of the year with 20 plus percent EBITDA in both Q3 and Q4. We think we're going to get pickup on 2 out of our 3 P and L lines. We feel like there's room to improve with the great work that our quality operations regulatory team is doing and providing efficiencies. We'll see some benefit from mix, but gross margin should improve some. I've provided some comments in my script that we expect mid-80s there.

Speaker 3

I would expect SG and A improvement on a relative basis. We do continue to invest in sales force and medical education training is going to be big for us. But with our spending discipline and the leverage we're getting from our top line growth, I would expect some pickup on SG and A. From an R and D perspective, however, we exit the year at 2% on a continuing ops basis for R and D. I would provide in my comments that we expect 2024 to be mid single digits relatively for R and D as we invest in studies around EpiFact in Japan and other places just to continue to differentiate our product and provide the bodies of evidence in peer reviewed journals to help with both our physicians and our payer constituents.

Speaker 3

So all that really leads to 20 plus percent EBITDA guidance for next year.

Speaker 4

Got it. Thanks guys and congrats again on the great quarter.

Speaker 2

Thank you. Thanks, Chase.

Speaker 1

Our next question comes from

Operator

the line of Carl Byrnes with Northland Capital Markets. Please proceed with your question.

Speaker 5

Thanks. Congratulations. Again, thank you for the question here. First, how should we look at or think about the conversion rate of EBITDA to free cash flow with I think for the quarter $24,000,000 and EBITDA about 10 $1,000,000 with respect to free cash flow?

Speaker 1

And then I have a follow-up as well.

Speaker 3

Yes. Again, pleased with our execution. And really the big event for us was late last summer when we suspended our knee OA program, really improved our cash profile and cash generation. Our free cash flow conversion was roughly 50% in Q4 as we went from EBITDA to free cash flow of $10,000,000 for the really the back half of the year, we're at 56%.

Speaker 2

So as we sort of

Speaker 3

move into 2024, while we don't guide cash flow, we expect improvements there. Joe in his comments alluded to the efficiencies around interest expense was $6,000,000 over $6,000,000 last year. We expect that to be much slower this year. We've got a lot of our legacy legal issues behind us, professional fee spend and so on will go down. So we and together with our top line growth and strong EBITDA margins, we expect free cash flow conversion to continue to improve.

Speaker 3

Great.

Speaker 5

Thanks. And then, with respect to getting into xenografts and synthetics, would that be an area where you look to develop new products or would it be in the nature of that or potentially a combination of both?

Speaker 2

More than likely a combination of both. So we have efforts ongoing both internally and substitute portfolio to include the products you just mentioned.

Speaker 5

Got it. Great. And the last question, and thanks again. With respect to new products, are you still on track to add 1 to 2 new products per year? Should we be looking at an additional product addition this year and then a couple additional products in 2025?

Speaker 5

Thanks.

Speaker 2

I think it's an aspirational goal. If we get 1 to 2 out a year, I think that's pretty good. But when you have right now, we're kind of focused on the launch that's ongoing. And we have multiple products in development in process, if you will. When you stage them is a function of when they're ready and then really when you want to move them into commercial launch based on other priorities you might have.

Speaker 2

So yes, I think it's an aspirational goal.

Operator

Our next question comes from the line of RK with H. C. Wainwright. Please proceed with your question.

Speaker 6

Thank you. This is RK from H. C. Wainwright. Couple of quick questions.

Speaker 6

Just trying to see if you can give additional color on the launch of FX in Japan. And also when would you think that market will become meaningful for you folks?

Speaker 2

Yes. We talked about today was really kind of activity based results, mainly because the numbers are still relatively small for us. And as you know, as we've spoken about in the past, we're a first mover in this market. So there's a lot of kind of missionary work that needs to be done from an education standpoint, from a reimbursement standpoint, etcetera. We were really pleased with the progress we made throughout the course of the year, the number of physicians that were trained, the number of hospitals that started to bring the product on board, essentially all the largest wound care centers in the country are now touching the product and we have some of the largest or most prestigious key opinion leaders that are ordering the product and reordering the product, reimbursement is in place.

Speaker 2

So it's just early stage. Now you have to wait for results to come back and for doctors get used to using the product. And whenever you're launching a new product, it takes a while. Whenever you're launching a first of its kind product, it takes a bit longer and we're doing it in a business culture that moves at a different pace than what we used to, it takes even longer. So pleased with the activity.

Speaker 2

It doesn't cost us a lot of money to be there.

Speaker 1

It won't take long before we're at a

Speaker 2

point where it's potentially accretive or at least breakeven. So it's not a big resource to reinforce, and we think it's a smart investment given where we are. In terms of when it will be a material contributor, I don't know. It's probably going to take still a bit longer before we can start talking about it in terms of revenue contribution. I could tell you that the percent increases are phenomenal, but the percent increase is off of small numbers.

Speaker 2

So it's going to take a while, RK.

Speaker 6

And then the other question, another strategy question, you have been talking about this adjacent market strategy for a couple of quarters now. So trying to figure out like when we would have some tangible products in that field either organically or inorganically And how is this a different leg of growth that we should expect to happen once the current momentum that you have gained in the private office gets to a plateau region?

Speaker 2

So I got most of that. I think it was around timing on when we would have new product introductions associated with potential external agreements around Zenos or Synthetics, right? So why didn't we prioritize that? We prioritize that because those two areas of the skin substitute market make up about half of it. And the market that we're in today, as you know, is only the amniotic space, is a little bit less than half of the total skin substitute market.

Speaker 2

So it just makes good natural sense for us to leverage the entire commercial infrastructure we have in place and move more through that channel. So that was the basic rationale there. In terms of timing, hopefully sooner rather than later, but I can't give you any more specific anything more specific than that.

Speaker 6

Okay. Thanks for taking my questions.

Speaker 3

Thanks, RK.

Speaker 1

Our next question comes from

Operator

the line of Anthony Petrone with Mizuho. Please proceed with your question.

Speaker 7

Thanks and congrats on another solid quarter here. Maybe, Joe, start a little bit with Wound U. S. Physician office Wound Care. Going back to some of the trends last quarter that given the sort of shifts that we saw from Novitas, First Coast and some other local MAX that there was a little bit of confusion there in terms of ordering patterns.

Speaker 7

Now there's a few kind of months here to sort of let this sit in as to where I guess we are in this transition for reimbursement in wound care. So can you give us a little bit of an update on ordering patterns? Did it normalize to some extent in the Q4? And probably more importantly, how are those ordering patterns as we sit here exiting February? And then I'll have a couple of follow-up questions.

Speaker 2

Yes. Ordering patterns did normalize. And then also

Speaker 3

got a little bit

Speaker 2

of an accelerant because we had a new product launch in the

Speaker 3

physician office, as we talked about.

Speaker 2

We started the year with seeing similar trends as we start the New Year. Obviously, our comps are going to be a bit more challenging in 2024, but we did see very similar trends through the 1st part of the year 1st part of quarter, I should say.

Speaker 3

Anthony, well, this is Doug. While we're on the topic, I'll say that Q4 also benefited from just we saw procedural volume increases as a company and as a top line sort of cadence perspective, let's say that seasonality is returning. And so Q4 certainly benefited from that and also sort of visavisour 2024 guidance, if you think about our cadence, I think Q1 is going to be back to sort of the traditional seasonality there, where Q1 deductibles reset and things like that will be our lowest quarter and we'll finish with Q4 being our strongest quarter. But I wanted to remind everybody of that.

Speaker 7

Very helpful. And a couple of quick follow ups. One would just be when we think about just next horizons and updates from the local MAX, will they be with the CMS proposal season June, July or will they be off cycle? Just latest thoughts there. And the last one, just maybe a recap from Joe and or Doug on sort of the M and A wallet.

Speaker 7

Cash balance is certainly healthy. You can tap obviously the credit markets. Just thinking about the size of acquisition targets that we should be thinking about from the inorganic side? Thanks.

Speaker 2

Yes. My guess on the CMS would be the annual cycle will probably if there's anything to talk about or any potential changes, that's probably where we're going to see it. The MAX can do anything in one off cycle as we saw last year. But given the way that ended up, my guess is it's probably going to be more tied to the annual cycle. But we really don't know, right?

Speaker 2

As I indicated, they can do stuff off cycle. So we'll see how it unfolds this year. In terms of M and A, you're right, the financial profile of our balance sheet is much improved over the course of the year. So it gives us a little flexibility. In terms of size of deals.

Speaker 2

But at this point, we wouldn't restrict ourselves. Obviously, if we did anything in terms of M and A, it would be to accelerate a strategic plan. So A, it would have to fit strategically and culturally. It would have to be accretive or lead to accretion in a given amount of time. And we wouldn't overburden organization.

Speaker 2

It would So it's hard to say. It would hard to put brackets around it at this point. I don't think it's very productive. I would just say if it makes sense, we'll take a look at it.

Speaker 7

Appreciate that. Thank you.

Speaker 2

So hopefully, you're seeing it, Anthony, the way we've run the business over the last 12 months and probably even more so since Doug has joined the team, We tend to have a fairly disciplined approach to both the P and L and the balance sheet. And that does give you greater flexibility to scale the business over time. But we certainly wouldn't revert back to that. It wouldn't change our behavior around that kind of financial discipline because we like a new shiny object that's out there.

Speaker 7

Absolutely. Appreciate that. Thank you, Joe.

Speaker 1

Our next question comes from

Operator

the line of John Vandermosten with Zacks. Please proceed with your

Speaker 8

Great and good afternoon everybody and thank you for the low double digit revenue growth guidance. And I wanted to ask another question on that regarding how the trend might be. Should we expect even increase over the year? Or should we expect some quarters to be a little bit stronger than others on a year over year basis with that low double digit guidance?

Speaker 3

It's a good question, John. This is Doug. I can start to provide color. But obviously excited to exit last year at 17% and close the whole year at 20%. But we knew that as we anniversary new products, we were going to sort of slow the headline rate going into 2024.

Speaker 3

And we've talked about sort of low double digits as a kind of sustainable growth rate for us and 2024 will be no exception. From a cadence perspective, I would not expect the growth rate to be I would expect accelerating revenue as we get through the year and new products continue to ramp at the effect, amnio effect we've talked about and with growth there. But I would expect that the Q1 would be our lowest returning to traditional seasonality and certainly that the back half of the year will be the majority of our revenue.

Speaker 8

Okay, got it. And then looking at the balance sheet, you had some movement there, especially in the debt line. And I think we'll probably replace that $48,000,000 with $28,000,000 by the end of the Q1. Does that sound right?

Speaker 3

Well, it'd be more like $18,000,000 We repaid the $30,000,000 revolver just a few days ago and that leaves us with $20,000,000 of Term Loan A outstanding. And we're excited that we finished the year with over $80,000,000 of cash on a sort of net debt or net cash basis. We were $30,000,000 positive there and excited to have the ability to reach back out for more dry powder with the new facility and the $75,000,000 capacity if and when we need it.

Speaker 8

Okay. And it sounds like you'll have that $75,000,000 available and that the cash balance will be pretty much the same as it was at the end of the Q4, at the end of the Q1?

Speaker 3

Well, we repaid $30,000,000 So on a net basis, yes, I would expect

Speaker 2

we typically burn more cash in the Q1, too. We do. That's an important point.

Speaker 8

Okay. Got it. Got it. And then looking at what you announced about a quarter ago, MediWound and the study that they were putting forward, has there been any progress on that? And how is it working within?

Speaker 8

And any updates on how that collaboration is going?

Speaker 2

I think we're just starting to get the sites up and running. So it's early stage.

Speaker 8

And that was a Phase 3, if I remember my reading on that. Is that correct? Yes, that's right.

Speaker 3

It was.

Speaker 8

Okay, very good. And then looking at Japan, just one more question there. We did have a few on that. I think you mentioned that over 500 physicians are trained and there were 70 accounts that were penetrated. What is the penetration rate?

Speaker 8

I know you have relatively low sales, but I'm just wondering how much further you can go in terms of physician training and also formularies, I suppose, or supply being available to supply those physicians? What's that penetration rate?

Speaker 2

It's still relatively low. We've gotten to a lot of the big facilities and the key opinion leaders, but we need to go deeper into these accounts and we need to start to drive greater penetration in terms of usage, the number of patients that are getting access to the product. So it's still working through the normal dynamics. You can imagine it's a higher reimbursement than anything else they're used to in terms of current standard care. So that takes a bit to digest that they're going to want to see ROI on that.

Speaker 2

So it just takes time.

Speaker 8

Okay, got it. Thank you, guys.

Speaker 2

Thanks, John.

Operator

There are no further questions in the queue. I'd like to hand it back to Joe Capper for closing remarks.

Speaker 2

Thank you, operator, and thank you, everybody, for your questions and your continued interest in the company. We look forward to speaking to you again at the end of Q1, which will be in a few months. Thanks everybody. Have a great evening.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Earnings Conference Call
MiMedx Group Q4 2023
00:00 / 00:00