MDXG: 1Q:22 Financial Results

By John Vandermosten, CFA

NASDAQ:MDXG

READ THE FULL MDXG RESEARCH REPORT

First Quarter 2023 Results

MiMedx Group, Inc. (NASDAQ:MDXG) reported first quarter 2023 revenues of $71.7 million, representing a 22% year over year growth rate, surpassing our $64.2 million estimate. Loss from operations was ($3.4) million, negatively impacted by higher-than-expected Investigation and Restatement costs. SG&A and R&D expenses were also greater than of our estimates; however, higher sales commissions contributed to the former and an acceleration in spending on the knee osteoarthritis trial led to the latter. First quarter results were reported in a press release, filing of Form 10-Q and a conference call with management which provided an opportunity for analyst Q&A.

The knee osteoarthritis (KOA) trial has begun and is now enrolling and injecting subjects. Other news since the start of the year includes the appointment of CEO Joseph H. Capper at the end of January to take the reins from interim CEO Todd Newton, who will remain on the Board. The CFO will also be departing MiMedx and will assist in the search for a new executive to assume this role.

Revenues and net loss for 1Q:23 were $71.7 million and ($5.0) million. Net loss per share was ($0.03) and for common stockholders ($0.04). These results compare to revenues and net loss of $58.9 million and ($0.09) generated in 1Q:22.¹

For the quarter ending March 31, 2023, compared to the one ending March 31, 2022:

➢ Reported revenues were $71.7 million, up 22% from $58.9 million. Revenue increased on due to the contribution from new products, and easier comparisons in 1Q:22 related to disruptions related to the Omicron wave of COVID. An additional shipping day also contributed to the increase. Hospital care sales increased 17% and Private Office rose 33%. Other net sales were up 18.7%, driven by initial sales of Epifix in Japan;

➢ Gross margin declined by 40 basis points to 82.7% from 83.1%;

➢ SG&A was $52.3 million, up 5.5% from $49.6 million reflecting higher commissions related to increased sales volume and greater sales through sales agents. Travel expenses increased as prior year travel was limited due to COVID-related travel restrictions, These increases were partially offset by a decrease in personnel expenses;

➢ Investigation, restatement and related expenses were $3.7 million, up from $2.6 million;

➢ R&D expenses were $6.5 million, increasing 8.9% from $6.0 million, related to increased activity for the KOA trial partially offset by lower spending in the wound and surgical segment;

➢ Operating loss was ($25.0) million vs ($5.0) million;

➢ Interest expense was ($1.6) million versus ($1.1) million due to higher interest rates;

➢ Net loss was ($5.0) million versus ($10.5) million, or ($0.03) per share versus ($0.09) per share.

As of March 31, 2023, cash stood at $61.2 million, compared to $66.0 million at year end 2022 on cash burn of ($4.7) million. Debt was carried on the balance sheet at $48.7 million. Adjusted EBITDA for 1Q:23, as calculated by the company which adds back costs incurred related to the investigation and restatement and share based compensation, was $5.5 million which compares to prior year loss of ($1.7) million. EBITDA calculated by the company and Zacks was ($2.5) million and ($8.3) million for the 1Q:23 and 1Q:22 periods respectively.

Turn Therapeutics

In early December 2022, MiMedx announced an agreement with Turn Therapeutics to provide the benefits of its antimicrobial technology, PermaFusion, to support the development of new wound and surgical recovery products. This will allow faster development of amniotic tissue and particulate products with antimicrobial features. Turn’s 510(k) did not reach the agreed-upon milestone and MiMedx management is renegotiating the agreement. MiMedx maintains rights to the antimicrobial technology which may provide the technology for a new product.

Commercial Launch of Epifix in Japan

Reimbursement approval for Epifix was granted for Japan in late 2022 as shared in a September 12th release. Commercial launch was announced on January 4th, 2023 with an exclusive distribution agreement with Gunze Medical Limited and first sales have taken place. Gunze distributes a wide selection of bioabsorbable devices, medical products and materials including artificial skin brands Pelnac and Pelnac Gplus. While the company was founded and headquartered in Japan, it also has operations in Europe, Asia and the Americas. Gunze offers a team of 90 sales representatives across Japan and strong existing relationships with providers. The partner will further advance the physician education regarding Epifix and support key opinion leader (KOL) engagement.

The Epifix launch team has collaborated with other entities such as local physician societies including the Japanese Society for Foot Care and Podiatric Medicine and 20 KOLs throughout the country to increase physician awareness. Over 250 doctors have been trained on the product and several have already treated patients using Epifix.

Now that Epifix is available in Japan, MiMedx has access to an estimated $500 million market and 400,000 patients in the hard to heal wound space for the treatment of refractory diabetic and venous ulcers. Epifix is the only amniotic tissue product approved in Japan and an important stepping off point for further product penetration. The product is eligible for reimbursement from the Japanese Social Healthcare System. Pricing for the product was set at 35,100 Yen/cm² or approximately $245 per square centimeter using recent exchange rates. Further milestones required prior to sale include completing distributor agreements, training, gaining local patient experience and building market awareness. MiMedx continues to train physicians on the use of Epifix with further penetration expected. While revenues from Japan were not disclosed and we expect them to be small in the early quarters, this source was highlighted in the first quarter as contributing to sales growth in the “Other” care settings segment.

Joseph H. Capper Appointed as Chief Executive Officer

The Board of Directors appointed Joseph H. Capper as Chief Executive Officer as memorialized in a press release on January 30, 2023. Mr. Capper replaces interim CEO Todd Newton who assumed the role in early September 2022. Previously, he served as CEO of several organizations in the health care field including BioTelemetry, Home Diagnostics and CCS Medical. He also has big pharma experience with Bayer AG, where he held multiple leadership positions and functioned as the National Sales Director of the Diabetic Products Division. He also served as a Naval Aviator and congressional liaison during his time as a naval officer. His academic background includes an undergraduate degree in Accounting from West Chester University and an MBA in International Finance from George Washington University.

Ricci S. Whitlow Appointed as Chief Operating Officer

On January 3, 2023, MiMedx announced that Ricci S. Whitlow had been appointed as Chief Operating Officer (COO) to lead the company’s manufacturing, supply chain, procurement, quality, and regulatory functions. She had previously held the role of President at Catalent where she led the Clinical Supply Services division. Other companies listed on Ms. Whitlow’s resume include Optinose, LifeCell, Kinetic Concepts and Johnson & Johnson. She earned a Bachelor of Science in Industrial Engineering from Texas A&M University and a Masters of Business Administration from New York University.

Chief Financial Officer Transition

On March 23rd, MiMedx announced that CFO Pete Carlson had decided to leave the company to pursue other opportunities. An executive search is underway to identify a new CFO and Mr. Carlson will assist in the search process to ensure a smooth transition.

CMS Proposal for Skin Substitutes

Roughly 21% of MiMedx’ business is comprised of private office wound care which is affected by Center for Medicare and Medicaid Services (CMS) pricing and bundling practices.² Of these sales, over 90% is related to Epifix and the remainder from Epicord. In the last few years, skin substitute products that were previously not listed on the Average Sales Price (ASP) list have led to a dramatic increase in Medicare expenditure, that according to input from the team in the field, were driven by increased use of financial incentives. The rise is spending has led to efforts by Medicare to reduce costs and transition all skin substitutes to the ASP list. The agency is now in the process of receiving feedback from stakeholders and is expected to come up with refinements that reduce unnecessary spending in this category.

The Office of the Inspector General (OIG) developed a report that reviewed skin substitute expenditures and recommended that CMS shift to average sales price (ASP)-based payments as soon as feasible to reduce Medicare expenditures for this class of product. The OIG found that almost half of manufacturers failed to report ASP which led to higher prices being reimbursed and potentially “tens of millions of dollars” in unnecessary spending. The OIG recommended that CMS obtain ASP data and determine its reimbursements based on this information.

Background

In recent periods, competitors with lesser quality or more basic products present a financial incentive that has shifted demand away from MiMedx’ skin substitute products, potentially to the detriment of the patient. CMS presented draft guidance that failed to address this issue and has since realized that the issue is more complex than initially thought. CMS' proposal was to transition private office reimbursement to a bundled pricing scheme in 2024. It may consolidate into a single bundle rather than a high and low cost bundle which could pose pricing pressure on MiMedx’ skin substitute as lower cost and less effective alternatives (such as simple dressings like gauze) may be used instead. As a result, the agency held a meeting in January 2023 to further understand the impact of terminology and payment policies on product use.

On November 1st CMS proposed calendar year 2023 payments for products and services that fall under its aegis. The agency has finalized a policy to assign any synthetic skin substitute that is described by the Healthcare Common Procedure Coding System (HCPCS) code C1849 to fall into the high-cost skin substitute group. For skin substitutes, CMS announced that it has not finalized its proposal to change the terminology of skin substitutes and desires additional interaction with stakeholders prior to doing so. The proposal is considering the elimination of HCPCS code C1849, which is used for synthetic skin substitutes; however this may not be in the best interest of patients as it does not provide sufficient incentive and guidance to use the correct skin substitute when appropriate. A Town Hall meeting was held with stakeholders in late January with participants voicing a desire for average selling price (ASP) + 6%, which is the standard in the industry for reimbursing pharmaceuticals. A CMS ruling on the matter is expected in the fall.

Launch of Knee Osteoarthritis Trial

MiMedx has launched its 470-subject Phase IIb knee osteoarthritis (KOA) trial and has now enrolled and injected the first patients. The study’s co-primary endpoints will be the Western Ontario and McMaster Universities (WOMAC) Osteoarthritis Index pain and function scores. Three arms will be divided among a 40 mg dose of dehydrated human amnion/chorion membrane (dHACM), a 100 mg dose and saline placebo. Endpoints will be measured at six months and again at twelve months. In January the company modified the CRO agreement with Nordic in order to reflect additional elements required in conducting the trial. The change modified the scope of Nordic’s responsibilities shifting some activities to other vendors to be administered by Nordic and other activities to MiMedx. The changes primarily related to areas of patient recruitment and screening and statistical analysis.

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1. Note that shares outstanding is calculated using shares provided on income statement whereas shares outstanding on page 1 of this report include Series B convertible preferred stock as converted. Series B convertible preferred stock is mandatorily convertible into shares.

2. This was revised lower from about 30% in MiMedx original discussion of the issue as not all private physician business is reimbursed by CMS-regulated pricing.