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MDXG: From Womb to Wound

·7 min read

By John Vandermosten, CFA

NASDAQ:MDXG

READ THE FULL MDXG RESEARCH REPORT

Initiation

We are initiating coverage of MiMedx Group, Inc. (NASDAQ:MDXG) with a target price of $16.00 per share. This valuation is based on our estimates for continued growth of the company’s Puri-on® processed orthobiologic tissue products for wounds and successful pivotal trials in plantar fasciitis and knee osteoarthritis. We anticipate a near term impact from the end of enforcement discretion in mid-2021. However, demand for existing wound repair solutions, growth from new products, international expansion and successful clinical trials in several indications are expected to dramatically offset this over the next few years.

Exhibit I - MiMedx Product Example: EpiFix (1)

MiMedx differentiates itself from other regenerative medicine companies with a sizable library of preclinical and clinical research that supports the safety and efficacy of their placental and umbil-ical cord products. Below we list the company’s current portfolio of products.

Exhibit II – Summary of MiMedx Products (2)

Wounds are a common health concern in the United States and the rest of the world. Chronic wounds are present in about 6 - 8 million (3) Americans and have a prevalence of 1-2% globally. Despite standard of care treatment that includes debridement, dressing and treatment of super-imposed infections, only about 40% (4) of wounds heal after 12 weeks, highlighting the need for improved approaches. We anticipate continued penetration into this market propelled by sup-portive clinical studies, inclusion on the largest managed care formulary and expansion into other geographies outside the US, especially Japan.

MiMedx has three clinical development programs underway in knee osteoarthritis, plantar fasciitis and Achilles tendonitis. These indications have annual prevalence rates of 4-6%, ~1% and ~60,000 respectively in the United States. While the AmnioFix injectable has been used in non-homologous applications (which will soon require FDA approval for continued sales), we believe that with supportive data and the FDA’s assent, penetration into these markets can be substan-tially increased. Adjacent markets, such as in other joints and tendons may be expansion oppor-tunities. To date there have been no reports of direct adverse reactions related to human uses of amniotic membrane products supporting a durable safety record and a strong rationale for eventual approval of ongoing studies.

Exhibit III - MiMedx Clinical Pipeline (5)

We anticipate that the Phase III plantar fasciitis (PF) and Achilles tendonitis (AT) programs un-derway will be complete by 2021 and shortly after the company will file a Biologics License Ap-plication (BLA) with the FDA, dependent on the trial outcomes. The Phase II knee osteoarthritis program is targeting a late 2024 or early 2025 BLA filing with the agency. In parallel with regula-tory submission in the US, we also see similar efforts in other selected geographies, especially Japan, the United Kingdom and Germany.

Pre-clinical work is underway in advanced wound care with three programs in effect including chronic wounds, surgical incisions and soft tissue defects. Increases in research and develop-ment spending have been allocated to support clinical trials following clearance of an investiga-tional new drug (IND) or investigational device exemptions (IDE). These applications are ex-pected to be filed in 2021.

MiMedx has suffered through a rough period over the last few years stemming from the unethical behavior of previous management. This included improper revenue recognition practices, false statements, action against whistleblowers and other wrongdoing. As a result, the company suf-fered considerable revenue loss, reputational damage and substantial legal action. In 2018, most members of the management team stepped down or were fired, all considered to be “for cause” separations. The company has since replaced the management team, settled 12 of 15 material litigation matters and is investing in clinical studies to expand the number of marketable indications for the product set.

MiMedx dominates the amniotic tissue market with an estimated 40% share in 2019 (6). While im-pacts from the end of enforcement discretion are expected to reduce revenues this year, after 2021 we see sales growth coming from the wound products segment, international markets and indications targeted by the development portfolio.

In 2013, MiMedx and other regenerative medicine companies were notified by the FDA that Am-nioFix Injectable, EpiFix Micronized and AmnioFill did not conform to Section 361 human cells, tissues and cellular and tissue based products (HCT/Ps) regulation and would require clinical tri-als to obtain marketing approval. A delay in enforcement of this rule (enforcement discretion) was granted until mid-2021 after which the products may require FDA approval to continue to be sold. MiMedx’ clinical development portfolio is directly targeting these products and the most important related indications. While our model assumes all of these sales will be lost by mid-2021, it is possible that the FDA will recognize MiMedx’ good faith efforts made with the active clinical trials and allow continued sales in order to address patients’ needs.

MiMedx holds a strong position in the wound care market with a supportive set of preclinical and clinical work demonstrating safety and efficacy for the company’s portfolio of products. With additional studies underway, new product launches and a favorable demographic trend, we antic-ipate double digit growth in the second half of 2022. We see a high degree of probability that the trials will be successful thereby supporting even greater penetration for AmnioFix and related products.

Key reasons to own MiMedx shares:

➢ Existing high margin business in placental and umbilical cord tissue products

o EpiFix

o EpiCord

o EpiCord Expandable

o AmnioFix

o AmnioFill

o AmnioCord

o EpiBurn

➢ Products recognized by payors

o EpiFix on largest US health insurer formulary for diabetic foot ulcers

o EpiFix and EpiCord allografts eligible for coverage by Medicare Administrative Contractors

➢ International growth opportunities

o Japan – anticipated approval mid-2021

o United Kingdom – approved, reimbursement in process

o Germany – approved, reimbursement in process

➢ Development candidates

o Plantar fasciitis – Phase III

o Achilles tendonitis – Phase III

o Knee Osteoarthritis – Phase II

Designated as a Regenerative Medicine Advanced Therapy (RMAT) by FDA

o Multiple preclinical advance would care development projects

➢ Investigation and expenses related to prior management misconduct are largely complete

In our initiation, we review the source and use of amniotic tissue in the treatment of orthopedic disorders, MiMedx’ primary market in wound care followed by a review of research and development projects in knee osteo-arthritis, plantar fasciitis and Achilles tendonitis. The report provides background to Section 351 and 361 regulated products and on the end of enforcement discretion, highlighting which products are affected. We then review the misconduct that took place in the years prior to 2018 and bring the investor up to date on resolution of the outstanding legal issues. Competitors and peers are discussed and compared along with a review of their market capitalizations and segment focus. Following a discussion of patents granted and pending, we provide and extended review of financial and operational results over the prior two years. Management is introduced and risks to the regenerative medicine industry and MiMedx specifically are discussed. Our final section discusses the assumptions behind our valuation, employing multiples of both earnings per share (EPS) and earnings before interest, taxes, depreciation and amortization (EBITDA). This analysis generates a one-year target price of $16.00.

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1. Source: MiMedx Product Brochure. EP578.001-EpiFix-HOPD-WCC-Brochure.pdf (mimedx.com).

2. Source: Zacks’ analyst work, MiMedx website, management interviews and financial filings.

3. Nussbaum SR, Carter MJ, Fife CE, et al. An economic evaluation of the impact, cost, and Medicare policy impli-cations of chronic non-healing wounds. Value Health 2018;21:27–32

4. Fife, Caroline, et al. Publicly Reported Wound Healing Rates: The Fantasy and the Reality. Adv Wound Care (New Rochelle). 2018 Mar 1; 7(3): 77–94.

5. MiMedx Corporate Presentation - February 2021

6. Assumes amniotic products market size of $748 million based on data provided by Markets & Markets and 2019 full year revenues of $299 million.