MiMedx Group, Inc. (NASDAQ:MDXG) Q4 2023 Earnings Call Transcript
MiMedx Group, Inc. (NASDAQ:MDXG) Q4 2023 Earnings Call Transcript February 28, 2024
MiMedx Group, Inc. misses on earnings expectations. Reported EPS is $0.04 EPS, expectations were $0.08. MiMedx Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the MiMedx Group Inc. Fourth Quarter and Full Year 2023 Operating and Financial Results Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Matt Notarianni, Head of Investor Relations. Thank you. You may begin.
Matt Notarianni: Thank you, operator. And good afternoon, everyone. Welcome to the MiMedx fourth 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. As part of today's webcast, we are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations Web site at mimedx.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. 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, 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. Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our annual report on Form 10-K.
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 Web site at www.mimedx.com. With that, I'm now pleased to turn the call over to, Joe Capper. Joe?
Joe Capper: 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. When I joined MiMedx 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. I believe when we look back at 2023 in a few years, it will prove to be the seminal year and 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 for 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 full year. Q4 net sales grew year-over-year by approximately 17% to $87 million, another outstanding growth quarter. Full year sales closed at $321 million, up 20% over the prior year. Gross profit margin improved to 84% in the quarter. Adjusted EBITDA was $21 million or 24% of sales in the fourth quarter and $58 million or 18% of sales for the full year, representing an increase of $51 million over the prior year. We ended the year with $82 million in cash. Our momentum continued with the successful commercial launch of EPIEFFECT 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 three primary aspects that drove the improvement. First, 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 fourth quarter. As a result of this conversion, approximately 30 million 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 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, two 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 $6.5 million of net interest expense the company was burdened with during 2023. Turning now to a progress check on the three 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 & Surgical markets by enhancing our product portfolio and expanding geographically. For the fourth quarter, 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. We believe these investments are essential to support further penetration into the surgical suite, which is a focus for the company. Our fourth quarter sales in the private office setting grew 24%. This was a sequential acceleration driven primarily by two factors.
First, 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 three of the Medicare Administrative Contractors or MACs. The plan was abandoned and we believe we had some benefit in the fourth quarter as physicians adjusted. Second, we moved into the commercial launch phase of EPIEFFECT, the newest addition to our advanced wound care solutions product portfolio for use in the private office market. As a reminder, EPIEFFECT offers a thick tri-layer configuration of [amnion/chorion] 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 graft in place with sutures is desired.
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 fourth quarter. 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. We established reimbursement and we have enrolled more than a third of the patients for our 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 drug allografts, we see increasing the breadth of our offering as the most advantageous way to improve our addressable market opportunity, as it opens up segments of the market where it is difficult, if not impossible, for us to compete today. 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%. If you would ask me earlier in 2023, 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 fourth quarter, 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 MiMedx stakeholders. Before I turn the call over to Doug, I want to provide commentary on AXIOFILL and our path forward. As you will recall, late in fourth quarter, we announced the receipt of a warning letter from the FDA relating to the regulatory classification of AXIOFILL, and only AXIOFILL.
Specifically, the agency's position is that AXIOFILL 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 AXIOFILL. 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. 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 mild issues. We disagree with this position when it comes to AXIOFILL 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. AXIOFILL is intended for homologous use by supplementing damaged or inadequate integumental tissue. As you can imagine, this situation slowed down the adoption of AXIOFILL, which is unfortunate given its impeccable safety profile and the patient benefit derived the product. Feedback from physician users of AXIOFILL 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 AXIOFILL 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. Doug?
Doug Rice: 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 fourth quarter 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 fourth quarter, 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 fourth quarter and full year '23 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-K filing for the period ended December 31, 2023. Moving on to top line results. As Joe noted, our fourth quarter and full year 2023 net sales of $87 million and $321 million represented 17% and 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 fifth consecutive quarter of strong double digits growth we have seen and demonstrates both strong market adoption and a high level of commercial execution by our sales organization across each of our sites of service in the period. You'll recall we launched our latest addition to our post acute product portfolio EPIEFFECT at the beginning of fourth quarter and began to see a nice uptake of the product in the physician office channel in the first quarter 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 fourth quarter 2023 gross profit was about $73 million compared to $60 million last year. Our gross margin was 84%, reflecting a more than 300 basis point improvement from the fourth quarter 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 gains 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. 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&A, was $54 million or 63% in the fourth quarter compared to $50 million or 67% in the prior year period. Although, improved on a relative basis due primarily to operating leverage, the increase in SG&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 fourth quarter R&D expenses were $2 million compared to $3 million in the prior year period.
As we head into 2024 and beyond, our R&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 product portfolio, including EPIEFFECT and also our other products used within specific surgical applications. One recent example of this would be 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&D spend to modestly increase on a relative basis to mid single digits. During the fourth quarter, we have recognized a roughly $37 million 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. These deferred tax assets on the balance sheet will be utilized in the coming years to lower our cash tax liability. From the 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 fourth quarter GAAP net income inclusive of the results of our discontinued operations was $53 million compared to a net loss of about $400,000 in the prior year period. Fourth quarter 2023 adjusted EBITDA was $21 million or 24% of net sales compared to an adjusted EBITDA of $7 million 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. Our fourth quarter 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 million of cash, which exceeds our previously stated goal of ending the year above $80 million, considering the $9.5 million share repurchase we executed with Hayfin in late October. Capital expenditures were $2 million 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. And finally, as Joe mentioned, in December and January we took steps to meaningfully strengthen and improve our balance sheet with 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 million outstanding revolving portion of our credit facility, leaving only the $20 million term loan outstanding. We continue to have access to the $75 million 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, $58 million or 18% in adjusted EBITDA and free cash flow of nearly $25 million, were major achievements for this company.
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 Joe. Joe?
Joe Capper: 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 million or 24% in the quarter. We continued to build cash and took other steps to improve our overall financial profile, then we moved into the full commercial launch of EPIEFFECT. 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. 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 fourth quarter in grand fashion. Throughout this past year, we took several crucial steps necessary to commence transformation of MiMedx into a truly exceptional company that is the benchmark for our industry. Much work remains but one can not 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. 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.
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