MiMedx Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 8 speakers on the call.

Operator

Greetings and welcome to the MiMedx Second Quarter 2024 Operating and Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Notariani, Head of Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to MiMedx's Q2 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 mymedix.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, adjusted EBITDA, free cash flow and cash balance growth, future margins and expenses 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. 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.

Speaker 1

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

Speaker 2

Thanks, Matt, and good afternoon, everyone. We thank you for joining us on today's call as we were very pleased to report the results of another solid quarter. For the Q2, we continued to achieve year over year top line growth, albeit at a slower rate. There are two factors that impacted the magnitude of our growth. First, we had a very tough comparison due to our strong performance in Q2 2023.

Speaker 2

And second, there continues to be dislocation in the private office setting caused by certain competitors and providers utilizing artificially high priced skin substitutes and questionable business practices targeted at Medicare beneficiaries. While less than 25% of our total revenue is tied to Medicare in the private office and adjacent settings, we have felt the impact of this behavior. I assure you, we are working on various options in the event no action is taken to curtail these practices. I will speak more on this topic later in the call. Importantly, the remainder of our business continues to flourish.

Speaker 2

We believe our industry will and must return to a more rational, data driven regulatory and reimbursement environment. In the meantime, it is important to realize just how well we have positioned Mymetix to navigate these short term headwinds. And we expect to emerge on the other side stronger than ever before. Over the past year, we have orchestrated a significant financial transformation for our company, and we remain laser focused on executing our strategy, which will ensure success for years to come. This much improved financial profile enables us greater flexibility and optionality as we navigate near term disruption.

Speaker 2

Moreover, I am confident we have the right plan and team in place to continue our momentum. As an industry leader, we continue to provide input and lobby the relevant governing bodies in an effort to help restore good fiscal governance to the Medicare portion of the private office setting. Now I'll take a few minutes to discuss the highlights of the Q2 and then update you on the progress we're making regarding our strategic priorities. For the Q2, net sales grew year over year by $6,000,000 or 7% to $87,000,000 marking another solid growth quarter. Gross profit was 83%.

Speaker 2

Adjusted EBITDA was $20,000,000 or 23% of net sales in the quarter, representing an increase of $6,000,000 over the prior year period. We ended with $69,000,000 in cash, a healthy increase of $21,000,000 in the quarter. We began the limited market release of Heliogen, which is the commercial name for the bovine derived particulate we acquired earlier in the year. We were thrilled to announce the well deserved promotion of Kim Mohler, Chief Commercial Officer for Mymetix. Kim has done a remarkable job over the last 4 years, building the Mymetics commercial organization into the high performing team it is today.

Speaker 2

And a few weeks ago, we were excited to have Nature Scientific Reports, which is a leading peer reviewed journal with a reputation for publishing best in class scientific literature, published a study demonstrating the benefits of MiMedx placental based allografts in surgical applications where pathological fibrosis results in detrimental scarring and dysfunctional tissue. Turning now to our strategic priorities. As outlined on prior calls, our plan is focused in 3 areas. First, we will continue to innovate and diversify our product portfolio. We have clearly built a strong core competency in the development and rapid commercialization of products designed to meet emerging physician and patient needs in all sites of care.

Speaker 2

2 of our most recent product introductions continue to perform at a high level. Amneo Effect grew nearly 40% year over year in the surgical market. And EpiEffect, which we launched late last year, continued to show significant strength in the private office. Both products have received widespread market acceptance and excellent physician feedback. Additionally, we continue to make progress building our Epifix business in Japan, where we posted another quarter of exceptionally high growth.

Speaker 2

Building on to the success of these recent product introductions, we expect a similar performance as we move towards full market release of our first xenograft. As a reminder, this new product is a 510 cleared, bovine derived collagen matrix particulate, which we have branded Heliogen and is indicated for the management of moderately to heavily exudating wounds and to control minor bleeding. During our soft launch, the product has been successfully applied in various surgical procedures, including Achilles tendon repair. That takes me to our 2nd area of focus, which is to develop and deploy programs intended to expand our footprint in the surgical market. In the past, we've spoken about the importance of generating real world evidence and scientific research demonstrating support for the use of our placental derived allografts in a variety of surgical procedures.

Speaker 2

We are currently working with key opinion leaders to produce evidence in surgical case studies as we know data is especially critical in this part of the market. To that end, the Nature Scientific Reports article I mentioned earlier is one of the more exciting and significant publications we have seen in quite some time. The prestige of this journal alone demonstrates the importance of the work. This study evaluated 2 configurations of Vimetic's proprietary placental based allografts for their ability to regulate fibrotic processes or scarring of connective tissue. The study found that both our dehydrated and lyophilized human amnion chorion membranes demonstrated in vitro modulation of collagen production, deposition and maturation in support of the hypothesis that amniotic membranes may function to interrupt pathological fibrosis and restore tissue homeostasis.

Speaker 2

The practical implications of these findings are immense. The possibility of reduced scarring or adhesion formation through the use of Mymetik's proprietary technology could enable accelerated and improved quality of healing with decreased incidence of recurrence. This creates the potential for enhanced surgical outcomes from improved functionality to superior cosmetic results simply by incorporating MiMedx proprietary membranes into the procedure. We are already seeing the real world benefits of such applications in a number of surgical applications. OBGYNs, for example, are using our tissue to help promote healing through healing during C section closure.

Speaker 2

And there are numerous other use cases and novel applications starting to develop. Considering the potential benefits demonstrated in this study and applying that to the tens of millions of surgeries performed in the U. S. Annually, the size of the opportunity could be staggering for MiMedx. The importance of this type of research and other supporting investments in order to continue to demonstrate the superiority of our technology cannot be overstated.

Speaker 2

We have the company's strategic compass pointed squarely in the direction of a greater surgical presence and we will continue to ramp up necessary clinical and marketing investments to support these opportunities. And of course, we're excited to move into full market release of Heliogen, our first xenograft particulate, which we will promote for use in surgical cases where such products may be more appropriate for various reasons. We expect this first xenograft product to provide for greater access into parts of the markets we have historically been precluded from competing. Our 3rd 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.

Speaker 2

In our markets, customer turnover is high relative to other industries, which impacts margins. We believe we have an opportunity to change this dynamic and build much stickier associations through an expanded customer centric offering, thereby increasing the lifetime value of each customer. The long term plan is to embed a customer centric mindset and processes into all facets of the organization, from product development to inventory visibility and account management. As mentioned a few months ago, we recently launched Mymedix Connect, our new customer portal, providing a far more streamlined digital connection with referring practices. The adoption rate is exceeding our expectations with nearly 25% of our active customers now using MiMedics Connect to interface with the company for processes such as insurance verification and product ordering.

Speaker 2

We will continue to enhance the feature set of platform and believe it will eventually become another distinct competitive advantage for the company. Now let me turn the call over to Doug for more detail on our financial results. 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 a reminder, 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.

Speaker 3

Beginning this quarter, in order to increase visibility, we added a few tables in the back of our press release that break out our non GAAP adjustments by expense line item. I encourage you to review these materials alongside my comments today. Additionally, and as a reminder, during the Q4 last year, we bifurcated our GAAP financial reporting to reflect the current and historical results of our recently disbanded regenerative medicine segment as discontinued operations. Accordingly, my comments today on our Q2 2024 results are made on a continuing operations basis and exclude the historical costs of the regenerative medicine business unit, which was suspended beginning in late Q2 2023. For a full discussion of the impact of these discontinued operations, please refer to our most recent 10 ks and 10 Q filings.

Speaker 3

Moving on to the results. Our Q2 2024 net sales of $87,000,000 represented 7% growth compared to the prior year period. As Joe mentioned in his remarks, there were several factors that drove this performance in the quarter and I would like to provide some additional color on each of them. By product category, net sales growth was relatively balanced between our wound and surgical businesses, particularly when you consider certain anomalies. 2nd quarter wound sales of $58,000,000 grew 8% versus the prior year period and 2nd quarter surgical sales of $30,000,000 grew 6% as reported and 13% excluding Axiophil and the sales of the dental product in the prior year period.

Speaker 3

2 of the standout contributors in the quarter were our AmneoEffect and EpiEffect products, which continue to gain traction in the surgical and wound markets, respectively. Turning to our results by site of service. While we saw positive growth in all of our sites of service during the quarter, as Drew mentioned, we have seen a sizable increase in competitive behavior related to the sale of artificially high priced products in the private office setting for Medicare beneficiaries. This has resulted in a deceleration in our growth rate compared to the Q1 of 2024 in each of these associated care settings. These competitive pressures resulted in higher than normal levels of employee and customer churn beginning about midway through the Q2.

Speaker 3

Additionally, the introduction of the proposed LCDs during the quarter prompted the beginning of some changes in behavior for portions of the private office site of service. But clearly, as evidenced by the performance of artificially high priced skin substitute, this continues to pose a challenge in the marketplace for us. Finally, as I mentioned earlier and to a lesser extent, our sales of axial fill declined on a year over year and sequential basis. While we still have a number of loyal accounts routinely using and ordering this product, our ongoing matter with the FDA is having an impact on this product line's performance with certain customers. The axial fill matter with the FDA remains on schedule and will likely drive toward a ruling from the court later this year or early next year.

Speaker 3

Taken together, these items softened our otherwise strong momentum in many market sectors and regions. Our Q2 2024 gross profit was about $72,000,000 compared to $68,000,000 last year. Our gross margin was 83%, down slightly compared to the prior year period due in part to incremental amortization expense from intangible assets acquired in the Heliogen transaction. Excluding this $400,000 impact, our gross margins were flat compared to the Q2 of 2023. Turning to our operating expenses.

Speaker 3

Selling, general and administrative expenses or SG and A was $55,000,000 in the 2nd quarter compared to $52,000,000 in the prior year period. SG and A was 64% of our net sales in both periods. The increase in SG and A was related primarily 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, offset by spending efficiencies in other areas. Our 2nd quarter R and D expenses were $3,000,000 or about 3% of net sales compared to $4,000,000 or about 5% of net sales in the prior year period. With our RCT underway, we continue to expect our R and D spend to modestly increase on a relative basis compared to 2023 to mid single digits as a percentage of net sales.

Speaker 3

Income tax expense for Q2 2024 was $6,000,000 reflecting an effective tax rate of 24%. This is roughly in line with our 25% long term non GAAP expected effective tax rate that we utilize going forward. Our 2nd quarter GAAP net income inclusive of the results of our discontinued operations was $18,000,000 compared to $1,000,000 in the prior year period. Our GAAP net income for the 2nd quarter was driven in large part by benefits we recorded associated with the resolutions of matters involving former officers. Adjusted net income for the quarter was $11,000,000 or $0.08 per share compared to $6,000,000 or $0.03 per share in the prior year period.

Speaker 3

2nd quarter 2024 adjusted EBITDA was $20,000,000 or 23 percent of net sales compared to an adjusted EBITDA of $14,000,000 or about 17% of net sales in the prior year period. Turning to our liquidity. The strong free cash flow generated by our business reached its highest level in the history of the company during the Q2 at $22,000,000 nearly the entire amount of free cash flow we generated in all of 2023. This enabled us to grow our net cash balance to $50,000,000 by the end of the second quarter, marking yet another significant improvement in our balance sheet as we work to strengthen our position in order to have the optionality to make investments in a number of different ways that we believe will unlock shareholder value. I will now turn the call back to Joe.

Speaker 3

Joe?

Speaker 2

Thanks, Doug. As you've just heard, we had another solid quarter. Net sales were $87,000,000 or 7% in the quarter. Gross profit was 83%. Adjusted EBITDA was $20,000,000 or 23 percent of net sales in the quarter.

Speaker 2

We ended with $69,000,000 in cash. We began a limited market release of Heliogen, our first xenograft product, and we're excited to see the nature publication and its foreshadowing of the vast potential for future applications of our allografts. Now let's return to a discussion of the reimbursement situation in the private office. On my very first Mymetix earnings call a year and a half ago, we provided commentary on challenges we were facing in the private office and adjacent care settings. Due to what we described at the time, as certain participants using loopholes in the Medicare reimbursement system in order to provide sizable financial incentives to physicians for using their products.

Speaker 2

Since that time, the situation has gotten dramatically worse as a result of new and intricate schemes designed with the express purpose of self enrichment by massively overbilling CMS for products with sparse supporting clinical data. Frankly, I am shocked this has been allowed to persist for so long, but remain optimistic it will be addressed in the very near future. To put this crisis in perspective, CMS payments for skin substitutes increased by over 2 60% or $2,500,000,000 in a single year from approximately $1,500,000,000 in 2022 to $4,000,000,000 in 2023. In recent months, the situation has reached a frenzied state, causing tremendous disruption and dislocation in the market, and MiMedx is not immune. While we have been fairly successful at holding this pressure at bay, the impact from what we consider improper business practices has been metastasizing.

Speaker 2

As a result, we have experienced above average employee and customer attrition as people leave in pursuit of what could be fool's gold. Practices in the skin substitute market have caught the attention of the Department of Justice, which last month announced a massive case involving the criminal prosecution of several individuals who were allegedly running a scam to overbill Medicare for skin substitutes. The problem has gotten too big to ignore and needs to be addressed. While we applaud the enforcement action to round up bad actors, we are in desperate need of action on the payer front to close the barn door. Just prior to our call a few months ago, all 7 of the Medicare Administrative Contractors or MACS published proposed local coverage determinations or LCDs in unison, which would in effect create a national coverage policy.

Speaker 2

As a reminder, the proposed LCDs call for utilization cap of 4 skin substitute applications per case with an allowance for additional applications based on medical necessity in instances when a patient's wound needs more help achieving closure. The proposed LCDs would also limit the number of products approved for reimbursement at 15 based on published non biased clinical evidence and would prohibit reimbursement for over 180 other products. 2 of our 3 products offered in the private office, including our flagship Epifix product are among the 15 approved for reimbursement. The 3rd Epi Effect is not on the list due to a lack of sufficient published evidence. However, we now have a highly powered randomized controlled trial underway for Epi Effek, which should lead to coverage in the future.

Speaker 2

The industry appears to be appropriately moving towards a requirement to produce clinical evidence to prove efficacy as products come to market. Given our long term commitment to evidence based medicine, this plays to MiMedx strength. It was a common period which ended June 8. In addition to providing comments to the MAX, we've made recommendations directly to CMS and other stakeholders. We are now awaiting word from the MACs on their plans for implementation of the LCDs.

Speaker 2

A few weeks ago, CMS published the proposed 2025 physician fee schedule, which does not include proposed changes to the pricing methodology for skin substitutes. That being the case, implementation of the LCDs in a format similar to what has been proposed is the most likely near term mechanism for Medicare to rein in this runaway spend. This will cause some level of disruption in the market, at least in the short term. However, given the balance of our product portfolio, our commitment to evidence based medicine and our much improved financial profile, I believe we are well positioned to navigate the changes and expect us to benefit in the end under a more rational reimbursement structure. In terms of guidance, we think the prudent thing to do at this point is to update our full year revenue growth guidance, bringing it from the low double digits to the mid to high single digits.

Speaker 2

To reiterate, while less than 25% of our business is in the effective care settings, our second half overall performance will be impacted by whether or not the MACs implement the proposed LCDs. Again, we see the implementation as a net positive for MiMedx, but until CMS provides some clarity on the path forward, we have to plan for continued disruption. Obviously, we will revisit expectations as we learn more. I want to stress that this fine tuning is specifically linked to this very acute reimbursement issue with the private office and adjacent settings and in no way diminishes our excitement about the long term prospects for the business and specifically our ability to grow the top line in the low double digits with a strong adjusted EBITDA profile above 20%, once we have cleared this challenge. Importantly, the LCDs do not affect the efforts and strategy underpinning our surgical business, which we think has a bright future with a large and growing addressable market, particularly as we expand our product portfolio and leverage the science supporting the superiority of our technology as demonstrated in the Nature publication.

Speaker 2

In closing, I would like to congratulate and thank the entire MiMedx team for delivering another solid quarter. I am confident we will navigate the current challenges we discussed and continue to stay focused on helping to improve the lives of the many people who are treated with our growing portfolio of products. 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. We will now be conducting a question and answer Our first question comes from Ross Osborne with Cantor Fitzgerald. Please proceed with your question.

Speaker 4

Hi, guys. Thanks for taking our questions. So starting off, we'd be curious to hear if you think you've seen the worst of attrition of customers in Salesforce to high priced products? And then going off of this, how should we think about revenue cadence for the balance of the year to get to your mid to high single digit guide?

Speaker 2

Yes. I do think we've seen the worst of it. We had kind of a bolus of activity in the second half of the second quarter. Like I mentioned in my commentary, higher than normal customer churn and employee turnover. So we moved pretty rapidly to kind of limit the damage there, rebuild in the areas that were most affected.

Speaker 2

Frankly, it was concentrated in a handful of areas, which made it a little bit more difficult to cover with adjacent folks. So we've worked through that. We think we're in pretty good shape now and expect that the worst of it is behind us. But that being said, there's still an awful lot of activity around the sales of these as we refer to as artificially high priced products. So we're going to battle through it.

Speaker 2

Best thing that could happen is that the government takes some sort of remedial action as soon as humanly possible. We had hoped to see it in the physician fee schedule, which was proposed a few weeks ago. We did not. So next best thing that can happen is for the MAX to implement the proposed LCDs in their current or some similar format. Again, this would curtail most of the behavior because those super high priced products are not on the approved list.

Speaker 2

But we have to plan for the worst. That'd be the case. We felt it was prudent to take guidance down to the mid to high single digits with potential upside if the LCDs are implemented. We plan for no upside in that guidance with LCD implementation because we can't predict when that will happen. But we thought it was the most prudent thing to do and that assumes kind of a similar run rate in sales to what we're seeing right about now.

Speaker 3

Yes, Ross, I'd also just add that sort of our back half guidance certainly anticipates continued momentum behind our recent launch of our Xenograft, Heliogen, Epi effect is off to a good start this year and certainly gaining traction with the Amneo Effect and our surgical suite and our international business continues to grow. But the vast majority of the turbulence we think will happen, as Joe indicated, because a lot of this happened in the second half of the second quarter. From a cadence perspective, I'd expect that continue to play out as we recover, and we've already filled almost all the gaps at this point for Q3. So and we've also got some traditional healthcare seasonality playing out in Q3. So I'd see Q3 as being more impacted than Q4.

Speaker 4

Okay, got it. That's very helpful. And then lastly for us, I'll jump back in queue. Can we spend a little bit more time in the RCT for Epi effect just in terms of the size, timeline and cost assumptions there?

Speaker 2

Yes. We did not put out the size in terms of number of patients. I would just refer to it as a highly powered, well designed RCT. It's already been through IRB. So the study is underway.

Speaker 2

We're at the outset of patient enrollment. We think timeline, I think, we had talked about probably around a year with interim report outs in like the 6 month timeframe. And I don't think we've put out a number on it, but well within our budget and we'll forecast. So we'll have a huge impact on our R and D spend as a percent of revenue.

Speaker 4

Got it. Thanks for taking our questions.

Speaker 3

Thanks for appreciating coverage, Ross. We appreciate our relationship with Cantor.

Speaker 4

Likewise. Thank you.

Operator

Our next question comes from Chase Knickerbocker with Craig Hallum Capital Group. Please proceed with your question.

Speaker 5

Good afternoon, guys. Just first, help me understand a little bit here, Joe, what was different in Q2 and kind of going forward relative to Q1 and kind of last year? Obviously, there's been these high ASP products in the market. Maybe speak to what happened kind of specifically in the second half of Q2 that was driving kind of additional churn of customers and sales reps in this quarter relative to others? Was there kind of new strategy from some of these players or just speak to exactly what was different?

Speaker 5

Thanks.

Speaker 2

I think it's just more of a Chase. You've been following us for a while now. We've been talking about this is an issue for a couple of years. Originally, we were lobbying to have people, other participants be required to report their ASPs so that everyone is plan on the even playing field. Folks were using, you may recall whack in invoice pricing and not reporting rebates that was causing a lot of issues.

Speaker 2

And then quickly people started to migrate to the ASP price as we saw this huge spike up of the number of products on that list. Then we saw companies start to price these things at dramatically high levels, 10 times what the normal price levels were. And using a scheme to rotate multiple products in and out of the market in order to keep that price at those high levels. So I think what's happened is a couple of things. 1, there's just more and more people get into the game and there's a lot more product in the market.

Speaker 2

There's a lot of people making a fortune by doing this. It kind of makes my stomach a little ill when I think about it because what they're doing is using these schemes to overbill Medicare at these artificially high prices, which hurts the transplant taxpayers and most of all, some of the most vulnerable members of our society, elderly people who are dealing with chronic wounds. So it's unfortunate. But I think to your point, it accelerated. We did a pretty good job keeping it at bay for a while.

Speaker 2

We've been lobbying the government to make change and we've been have had no success. So frankly, we're probably losing a little credibility in that argument, telling people that this is wrong and shouldn't be doing it. It's tough when everybody else is doing it and you see your friends making a bunch of money and then doctors are telling you how rich they're getting. So it's a hot mess and it needs to be addressed.

Speaker 5

Do you think there's any dynamic that now that these LCDs are out there and slated to potentially go into effect that there's a little bit of some spurring of usage because some of these loopholes might be closed in the fairly near term?

Speaker 2

I'm you're the ones here, right? I would love to see it. I think the fact that the LCDs are looming and we should hear something at any day or any day is helpful. The fact that the Department of Justice has now put a spotlight on it. There's starting to be some media coverage is picking up on it.

Speaker 2

We're lobbying with CMS. We're talking to the MAX. We're talking to lawmakers. We're talking to media. So people are starting to see this for what it is.

Speaker 2

It's a pretty elaborate scam. And when you looked at if you saw Matt, the chart from our presentation, look at the slope. When you go from like what $500,000,000 or less $500,000,000 in 20.20 to over $4,000,000,000 in 2023, there's no other product category that does that. This wasn't the introduction of a new life saving drug. This is using fairly mature products to overbuild the government.

Speaker 2

That's what this is all about. It's a very elaborate scheme to overbuild the government. And as I indicated, some critical or some vulnerable members of our society. So it has to change, right? You would think that this is going to get shut down.

Speaker 2

That being said, the people that we're talking to have to work through a process. There has to be a publication of proposed rule changes. There has to be comment periods, etcetera, etcetera. So they're working through the process, which unfortunately takes time. Yes, it's great that the DOJ has gone after people that are really abusing it.

Speaker 2

But that's they still need to close the front end of this problem.

Speaker 3

And Chase, I would say don't forget that this is one side of service and one payer that we're having this turbulence in. So I would expect that to normalize over time, but we believe that generally it's less than 25%

Speaker 2

of our

Speaker 3

total top line. The remainder of the business remains strong and healthy with a lot of growth drivers.

Speaker 5

Understood. And then just lastly from us. If we think about that LCD, whenever it does potentially go into effect, right? If we think about that Q1 for you guys, do you see that as being positive to the trajectory of revenue again in that Q1 that goes into effect even despite having some the revenue from Epi effect likely rolling out of the model in that quarter. So again just that quarter having a positive effect, the LCD have a positive effect on revenue that quarter?

Speaker 5

And then second, for Doug, just on EBITDA, do we still expect kind of 20% margins or how should we be thinking about EBITDA through the remainder of the year? Thanks.

Speaker 2

Yes, I would expect an uptick in the business soon after these things are implemented. I don't think there is a lot of inventory burn off when the inventory is priced at $2,000 per square centimeter. I just don't think people are carrying a lot of it. So my guess is we'll probably see the market shift pretty quickly. Doug?

Speaker 3

Yes. From an adjusted EBITDA perspective, we didn't guide. But the way I think about the back half of the year is we're certainly built to grow, we're built to scale, and we believe that a lot of the turbulence today is transient, and we'll certainly recover and we want to maintain the good infrastructure that we already have. But I would expect that while we had about 22% EBITDA in the first half of the year, we've guided previously that we thought would be north of 20%. I think we'll approach 20%.

Speaker 3

I think we'll be modestly below 20 for the back half of the year. And I would look at that as sort of gross margin in the low 80s at this point as we have less volume in this particular side of service to cover our fixed costs. And I think the other big driver here is that as the Epi effect RCP ramps up, that we would expect R and D to be closer to mid single digits at that point instead of the 3% or so that they run-in the first half of the year.

Speaker 2

Chase, it's Joe. Listen, I know we're talking a lot about the LCDs and I'm sure that rest of the questions we're going to get are going to revolve around this as well because of the nature of the issue. And as you indicate, it's been going on for

Speaker 3

a while.

Speaker 2

This is really the Q1 that we've talked about it this much and that we've been impacted by it. We do see it as transitory. We don't think it impacts the business long term. It's a nuisance that we have to deal with. However, as difficult as it is to deal with, we still recorded $87,000,000 house of revenue in the quarter, which is tied for the highest quarter we've ever had.

Speaker 2

And we're still generating a lot of cash and a lot of adjusted EBITDA. So we will get through this. And as you heard me indicate in the past that once we're on the other side of this reimbursement issue and once we get more stability from a regulatory standpoint, we fix regulatory and reimbursement in this industry. It's a lot more investable. And I think in the long run, this will all play out and we'll look back and laugh about it at some point.

Speaker 5

Got it. Yes. Thanks for taking the questions, guys.

Speaker 2

Thanks, Jason.

Operator

Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.

Speaker 6

Thank you very much, Joe. As you said, a lot of questions, a lot of comment on LCD. So following that, I've got one more. I'm just curious, obviously, last year significantly disrupted by proposals from some of the MAX that were subsequently withdrawn. Then they come out with a uniform LCD across 7 MAX this year.

Speaker 6

The one thing I don't think I've heard you guys comment about is do you get any indication from these MAX following the comment period, during the comment period, whether they are determined to write this wrong in the reimbursement loophole situation? Or do you think we could see additional wobbling on this topic at this time?

Speaker 2

It's a good question, Brooks. And I would say that they're fairly close to the vest in terms of given any sort of indication whether or not they're going to implement and when they would be implemented. So I can't handicap this for you. I wish I could. I would tell you though that in my meetings with the folks that we've been able to talk to, we've had several, they're highly sensitive to what's going on, highly sensitive and very inquisitive and asking a lot of questions and asking for follow-up calls.

Speaker 2

So they're doing the work on it, which tells me and again if I apply some level of logic given the escalation of the spend, which tells me some action will be taken in some format soon. But look, if I had a crystal ball, I'd have the answer for you, buddy.

Speaker 6

Right. Here we go. Totally understand. All right. Let me just ask you one more different question and that is, can you give us a sense for the timing of the full rollout of the xenograft product?

Speaker 6

And I think I heard you use a word that suggested you think the market is big, potentially big. And can you give us any sense for in dollar terms or whatever, how big you think it is for you guys? And sort of whether you think you can begin to really see meaningful incremental revenue yet this year? Is it more a 'twenty five event? Is it more a 'twenty six event as you look out into your crystal ball?

Speaker 6

Thanks a lot.

Speaker 2

Yes. Real excited to get this first one out into the marketplace. And as a reminder, this is a collagen based particulate. So it's going to be used in certain surgical procedures, tendon repair, etcetera. So we do think that there's a good application for this product.

Speaker 2

We plan to launch other products in the xenograft category as well. And as a reminder, that just opens up a lot more market of the total skin submarket with xenograft and synthetics covering the remainder. So big market opportunity for us to probably at least win our TAM. These are areas in the market that we have been precluded from competing in for a variety of different reasons. Sometimes it's cost, sometimes it's other reasons, some people don't want to use amniotic tissue.

Speaker 2

But I think it's a pretty good sized market opportunity for us. We'll see some upside from the product this year, and but really start to ramp up next year.

Operator

Our next question comes from Anthony Petrone with Mizuho Group. Please proceed with your question.

Speaker 7

Thank you and hope everyone is doing well. First one, just a follow-up on Xenograft. Thanks for that detail there. Competing today in 45% of the market, xenograft gets you in the remaining 55%. How many products do you need to sort of address that sort of large market opportunity you have an initial product in?

Speaker 7

How many more xenograft products do you expect to add? And then just a quick follow-up on LCD. When we sort of revert back to some of the data that was out there in terms of the overall billing into Medicare, it was over $1,000,000,000 The expectation is that some of that's going to go away, some of that's going to stay. But at this juncture, as this process is sort of evolving here and being extended ultimately, What do you think that opportunity is going to be in the U. S.

Speaker 7

Physician office once this settles out and we have a definitive path forward from the MAX? Thanks again.

Speaker 2

So let me get back to Zeno first. So yes, we need to round out that product portfolio. I'm going to think of it in terms of similar to what we're doing now in the tissue. We'll have sheets of different sizes and different thickness, etcetera, to use in different procedures, sometimes with a strong potential strength that you can use in more complex surgeries, product that can be sutured, etcetera. So I would say, I can't give you a number whether it's 2, 3, 4, 6, but we're going to have a variety of SKUs that meet the needs of the marketplace so that we can compete at all levels.

Speaker 2

The question about LCD market opportunity, how much of it is overutilization, how much of it is priced? Again, if you look at the one of the slides we had in the presentation, you can see that the line portion of that is utilization. So there's massive over utilization as a result of the opportunity to make these incredible amounts of money. So I think utilization is cut way back once this is shut down and cleaned up. And obviously pricing goes back in line.

Speaker 2

We've done a lot of sort of sensitivity analysis around this once this market is right sized, how much of it we would have an opportunity to compete for given our current share of amniotic tissue in some of the care settings and then looking at as patients migrate from one care setting to another, it's going to be a sizable opportunity for us, Anthony. I don't want to give a put a number out there, but it will be a pretty decent sized opportunity for us.

Speaker 7

Thank you so much.

Operator

Our next question comes from Karl Brink with Northland Capital Markets. Please proceed with your question.

Speaker 2

Thanks for the question. Most of my questions have been answered. Do you have any feel or expectations with respect to potential timeline of events that might lead the 7 MAX to adopt the LCD? Thanks. No, I wish they did, Carl.

Speaker 2

Thanks for the question. We talked a little bit about that already. When we asked the question, the answer we get is we're working through the process, we're working through the process. I would just go back and stress the fact that unlike this time last year, there is a much more heightened sensitivity at least from our perspective on various stakeholders who are involved in setting these rules. In our conversations, people are very in tune to what's going on.

Speaker 2

And obviously, that means that they're getting asked a lot of questions as well. So I think this has been elevated to a fairly high level in the various government agencies that have responsibility to either price or implement coverage determinations on these products. But it can't go on for all. Who knew that you didn't need a gun to rub the back, all you needed was a skin substitute. Thanks so much.

Speaker 2

Thanks, Karl.

Operator

There are no further questions at this time. I would now like turn the floor back over to Joe Cather for closing comments.

Speaker 2

I appreciate it. Thanks everybody. Appreciate your questions and your participation. Thanks for your continued interest in the company and we will talk to you next quarter.

Operator

This concludes today's teleconference. You may disconnect your lines at this time.

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Earnings Conference Call
MiMedx Group Q2 2024
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