Full Press Release Details
Event Name: Q2 2013 MIMEDX GROUP INC Earnings Conference Call
Event Date: 2013-07-31T14:30:00 UTC
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Converted From Text Transcript
Event Name: Q2 2013 MIMEDX GROUP INC Earnings Conference Call
Event Date: 2013-07-31T14:30:00 UTC
C: Thornton Kuntz;Mimedx Group Inc.;VP - Human Resources & Administration
C: Parker Petit;Mimedx Group Inc.;Chairman, CEO
C: William Taylor;Mimedx Group Inc.;President, COO
C: Michael Senken;Mimedx Group Inc.;CFO
C: Roberta McCaw;Mimedx Group Inc.;General Counsel
P: Matthew Hewitt;Craig-Hallum Capital;Analyst
P: Suraj Kalia;Northland Securities;Analyst
P: Bill Plovanic;Canaccord Genuity;Analyst
P: Bruce Jackson;Lake Street Capital Markets;Analyst
Operator: Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 MiMedx Group, Inc. Earnings Conference Call. My name is Jackie and I will be your coordinator today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session.
(Operator Instructions)
I will now like to turn the conference over to Mr. Thornton Kuntz, Vice President of Administration. Please proceed.
Thornton Kuntz: Thank you, Jackie, and good morning, everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements are based upon current beliefs and expectations of our management and are subject to risks and uncertainties.
Actual results may differ materially from those set forth in, contemplated by, or underlying the forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2012 and our most recent 10-Q.
We do not undertake to update or revise any forward-looking statement except as maybe required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under federal securities laws.
With that, I will turn the call over to Pete Petit, MiMedx's Chairman and CEO.
Parker Petit: Thank you, Thornton. Good morning and welcome to our second quarter conference call. I have with me today Bill Taylor, our President and Chief Operating Officer; and Mike Senken, our Chief Financial Officer; we also have Thornton Kuntz:, our Vice President of Administration and Roberta McCaw, our General Counsel.
I hope you've got a chance to read our press release on the quarter. I think I could classify this as another quarter of really good progress. We've had a number of important activities during the quarter, including moving our corporate headquarters into the new building. We will shortly also consolidate our processing facilities in the same building.
This required a considerable amount of effort in addition to all the things we manage everyday to maintain our rapid growth rate. We made more progress with reimbursement for our allografts. Just after the close of the quarter, we added one more Medicare contractor, and we now have a total of six of the Medicare contractors reimbursing for EpiFix wound care allografts. This just leaves three remaining.
The robust activity related to our clinical trials continues. We've just published the press release on another of our clinical trials on Monday and another press release regarding our first fundamental scientific study this morning. This published clinical trial related to the cross over patients in EpiFix randomized controlled trial and that was released yesterday. Results of our first scientific study have just been released and we'll discuss this study in more detail in a few minutes.
Relative to our financial progress, we maintained a positive EBITDA for the sixth straight quarter. While we burned cash during the quarter, we had some significant one-time expenses including those related to our move to the new facilities. During the quarter, Mike Senken, our Chief Financial Officer, put in place a line of credit with Bank of America. We'll continue to manage our cash carefully and prudently as always and we'll strive to maintain positive EBITDA, which will grow towards positive operating profit and then towards positive after tax profit.
However, we've continued to balance the ability to grow revenues rapidly and gain market share and market presence, while investing in our clinical and scientific studies. We make numerous decisions weekly relative to our commitment to building MiMedx the clear leader in this promising new area of amniotic membrane tissue grafts. From a revenue standpoint, we exceeded our forecast for the seventh straight quarter.
A few weeks ago, we've tightened up the revenue forecast for 2013 by raising our low estimate of $54 million and maintaining our high estimate of $60 million. Relative to our third quarter, we feel our estimates of $13.5 million to $16 million are still appropriate.
I'll make a few additional comments related to the other press release we had today on the publication of scientific paper, which is entitled Biological Properties of Dehydrated Human Amnion/Chorion Composite Grafts -- Implications for Chronic Wound Healing.
This study which was actually initiated almost two years ago was conducted at two prestigious institutions namely Stanford University Medical School and the Georgia Institute of Technology, biotechnology complex. The papers are first in a series of scientific papers that will characterize and clearly delineate the mechanism of action associated with our Purion Process layered on amniotic membrane tissue allografts.
This study and the others that will be published, aligns specifically with the corporate goal of being the most knowledgeable organization worldwide relative to the use of amniotic membrane tissue and the placenta. We have numerous studies and projects underway to guarantee MiMedx retains a leadership role with this promising new technology.
The basic point from this scientific study is that our Purion Processed allografts retain numerous growth factors and cytokines that orchestrate biological activity that attract the body's own stem cells to the wound site or surgical site.
At that point, complex biological mechanisms are all orchestrated in a way that Mother Nature clearly understands. Over time our scientific studies will more clearly delineate the interactions of many of these growth factors which would explain why our allografts are so clinically effective. While this paper highlights certain basic growth factors we know there are many more present.
So to be able to bring a tissue which has been created by Mother Nature and turned into an allograft by the MiMedx Purion Process to a wound site or a surgical site that energizes the body's own stem cells to migrate to a site is truly an extraordinary disclosure. We at MiMedx have determined that this action should be called a "stem cell magnet."
In the years ahead, MiMedx should begin to be a contributor to medicine that is associated with stem cell therapies. We plan to cooperate with research institutions and other entities to enhance the effectiveness and logistics of bringing stem cells to sites of injury, surgical sites and wounds.
I would also like to make a comment about our press release relating to company's filing a self registration.
First, let me make it clear what a shelf registration is and how it is used. Over the last several years, companies that use shelf registration is to prepare for some type of financing, it is not a commitment to do a financing and it is not specific as to the type of financing. It just gives a company a head start on the process and allows the company to react quickly as opportunities and requirements develop.
As you're aware, MiMedx has very prudently used our cash flow last year and a half since our last PIPE offering. We've had positive EBITDA for the last six quarters. However, with our company growing as fast as it is, we could use more cash on our balance sheet, if for nothing else, for contingencies and for nothing else, but help shareholders feel a little more comfortable with the situation.
However, our press release regarding a scientific study has just been accepted for publication by International Wound Journal is a clear indication of the opportunities we have with our amniotic membrane tissue allografts. Future scientific clinical studies will open up new opportunities for the use of allografts.
However, many of these opportunities will require a different regulatory pathway than the 361 Regulations, which govern our current product lines. It might be prudent for the company at some point to have additional cash particularly for clinical studies as they will relate to the new large market opportunities.
Therefore, as market opportunities develop, we may raise additional capital under the shelf. Although, the shelf would allow us to raise up to $100 million over the next three years, we certainly don't envision offering anywhere near that size in the near-term and probably over the three-year period. Please be comfortable that the MiMedx executives, who have been involved in public company management for over 30 years and accomplished numerous financing, will be very prudent if and when we decide to raise additional capital.
I'll now turn the comments over to Bill Taylor, our President and Chief Operating Officer. Bill?
William Taylor: Thanks, Pete. Good morning, everyone. As we indicated in our press release, this is our seventh consecutive quarter of meeting or exceeding our revenue guidance. We're very pleased that we were able to continue such strong revenue growth particularly with our move occurring in the middle of the quarter. I think our team did a great job staying focused in keeping our objectives in sight and on target.
Regarding the new building move, I'm happy to announce the first part of the move went very well. We contracted with Choate Construction, who did a wonderful job on the construction and our multitude of change orders. Now all of our corporate accounting finance and R&D, sales, marketing, reimbursement, clinical, legal, HR and IT are located at our new Marietta building. Tissue processing has not yet moved into the building.
You may recall from the last shareholder call that this move was planned in three stages. First is the corporate office move. Second is a portion of the tissue processing and third the balance of tissue processing. The new clean room is finished and this is just now on the beginning stages of validation.
Once that step is completed, we will complete validation and move about one half of our processors into this new building. We expect this to happen in late August. And then the balance of processing will follow about six weeks later. Remember we're going to be keeping our old facilities as incremental capacity and a disaster recovery location.
Now changing topic to our discussion on our publications. As you all know, we've been focusing not only on numerous clinical studies regarding our tissue, but also on the fundamental scientific studies that are designed to help determine the mechanisms of action of our tissue and various applications.
As Pete mentioned, our first scientific paper has been accepted in the International Wound Journal. If this sounds familiar to you, it should, it's the same peer reviewed journal that published our first EpiFix randomized controlled trial. This was purposeful on our part as the scientific paper starts to explain how our tissue was effective in healing chronic wounds.
We expect this to be published in e-format in the next few days. This is the first of at least three research papers that explain what happens biologically, when our dehydrated amnion/chorion membrane -- what we call dHACM -- is applied to wound site or the surgery site.
Due to the fundamental studies that have opened the door to a number of other applications beyond our current 361 tissue offerings, these three peer review scientific publications will be closely followed by several additional publications on the properties of our tissue as well as the result of a number of our animal studies using our tissue in unique ways. First, I'll describe the normal wound healing process and then I'll go into some additional detail on the stem cell magnet publication that Pete touched on.
The normal wound healing process has three major phases -- the inflammation phase, proliferation and remodeling. In the inflammation phase, essentially the T cells or white blood cells come into the site and clean up the cellular debris, essentially preparing the site for healing. The second phase is proliferation where resident fibroblasts proliferate and start creating a collagen matrix.
At the same time, stem cells come in to form the vasculature among other things. The third phase is the remodeling phase where the wound closes through remodeling, vascularization and epithelialization recruiting endothelial and stem cells that help complete that process.
In chronic wounds, essentially this normal process is interrupted and the wound is stalled in that early phase. What we believe happens when EpiFix is used is that the inflammation is modulated, and then our tissue helps proliferate fibroblast at the wound site, creating the collagen matrix. It also recruits stem cells to the site to help complete the healing. So then it's a stem cell magnet.
In this first scientific paper, our research department, which is led by our Chief Scientific Officer, Dr. Tom Koob, partnered with researchers from Stanford University School of Medicine and the Georgia Tech Biotechnology Complex to better understand these mechanisms responsible for these special healing qualities of our dehydrated amnion/chorion membrane allografts.
Basically, this paper shows that the key elements of our tissue -- the growth factors and the cytokines, etc. -- will modulate inflammation and will then balance out the wound site, so it does not continue to degrade and then it attracts cells to the site and encourages those cells to replicate. Those cells that are attracted to the site include fibroblasts, which are the cells that create the collagen matrix in a repair, endothelial cells, which are the blood vessel cells, epithelial cells such as the dermis and obviously stem cells which can differentiate into all of the above.
So why is this important? Well in short, it brings our technology into the stem cell arena, where rather than culturing a person's stem cells over time and reintroducing them to the original person -- so their autologous cells -- or culturing somebody else cells to place into a tissue defect, or allogeneic cells, our Purion process, dHACM or dehydrated human amnion/chorion membrane tissue can be placed on the site and recruit the person's own stem cells to come in and repair the damaged area.
Last one of biggest challenges in the current stem cells science is what's called engraftment. Basically, when you introduce cells into a local area, one of the biggest challenges today is how do you keep them there and how do you keep them alive. So allografts may actually play a role in solving this problem. And we're very excited about their potential.
On the clinical publication side, you already know about the four EpiFix case series that we published in peer reviewed journals and the first EpiFix randomized control trial we published in the International Wound Journal. Also our EpiFix crossover study were the first RCT control patients were offered EpiFix was published in the Journal of Wound Care this month. This is the population of people where only 8% of the people heal with standard of care in six weeks.
In the crossover they were offered EpiFix and 90% healed in nine weeks, most of those actually healing in six. So additionally, on the clinical study front, we heard last week that our first plantar fasciitis randomized controlled trial for AmnioFix injectable has been accepted in foot and ankle international, that's another peer reviewed journal.
The authors of this study are names you are probably familiar with. Dr. Charles Zelen, was also a principal investigator in our first EpiFix study. Dr. James Andrews, the renowned orthopedics sports medicine surgeons who is also an author and Dr. Atilla Poka, the renowned orthopedic trauma surgeon.
This study showed that 100% of the patients that completed the study that were treated with the injectable showed statistically significant improvement and their scores for pain and function beginning at the one week follow up and those results continued through week eight of the initial treatment.
It also showed that AmnioFix injectable is very effective treatment for patients with chronic plantar fasciitis, and may also reduce the costs by decreasing the need for repeat office visits or costly surgical interventions. There are in excess of one million visits per year to treat plantar fasciitis in the United States alone that translates into an addressable market with several $100 million.
At the time of our last call in early May, just changing gears to sales side, at the time of our last call in early May, our total sales force totaled 56 people. It's the number that stayed level for the quarter. The government sales force remains at 28 sales professionals in the commercial wound care sales force is at 21. The Surgical and Sports Medicine sales force is at seven.
We are in the process of hiring another half dozen or more sales professionals into the commercial and government sales forces this quarter. At present, we are still on track to ramp up to 70 to 80 sales professionals by the end of this year.
On the patent front, we now have eight issued patents and 33 pending patents for our issue. We expect a number of issued patents to continue to grow over the next several quarters. We continue to invest in our development efforts and are in the process of writing several additional new patent applications and continuations of previous applications. In fact, we have several additional applications being drafted at the moment.
We believe our IP portfolio continues to strengthen and this gives MiMedx the clear leadership position in this area. Regarding reimbursement, you will recall that we now have coverage with six out of the nine Medicare contractors or MACs, and we are working very hard to obtain coverage with the other three.
Of the six that our covering, all cover for diabetic foot ulcers and three of them cover for venous leg ulcers or VLUs. So we're also working very hard to expand the coverage to VLUs in those other three MAC groups that currently only cover diabetic foot ulcers.
Relating to CMS coverage, I want to highlight a proposed change in Medicare coverage. Every summer, usually in July, CMS releases a proposed rule changes for Medicare coverage for the following year.
The public is then given a 60-day period to provide comments and then in early November, the final rule is published to be effective at the beginning of the next calendar year. It is common that certain items that were focal point of the comments are delayed when rules were modified based on the comments received during the official comment period.
A new proposed rule for the hospital outpatient setting or [Opps] would bundle payment for drugs and biologics that function similarly to a device in a surgical procedure. So specifically this relates to skin substitute's category, if the proposed rule becomes final, then advanced Wound Care products like EpiFix would not be separately reimbursed in the hospital outpatient facility, but would instead fall into our bundled procedure code that reimbursed like a surgical DRG.
Our experts advised us that one of the driving factors for this change is a very significant amount of wastage associated with the two primary skin substitutes, which has been on the market for nearly 10 years. Of course, these are our primary competitors in wound care, Apligraf and Dermagraft.
When used on DFU's, these two products have wastage of approximately 75% because they both only provide one large side. Of course, with our very size appropriate allografts, EpiFix does not have the same wastage issues as those competitors. This is one of the reasons we've been taking market share from them over the last two years.
Also it's important to realize that this proposed rule does not affect payment in the doctor's office, which remains unchanged in the proposed 2014 reimbursement rules and of course, it does not affect our government business either.
So we're in the process of preparing our comments to this proposed rule which we will submit to CMS. While we don't believe that the proposed rule will become final as written, we believe that MiMedx is in a much better position than our competitors if it does indeed become final.
First and foremost, we have the various size appropriate grafts and we can also easily add incremental sizes to better tailor to the needs of the patient and they can be balanced with any new reimbursement model. Second, this proposed rule change does not affect the physician office reimbursement nor does it affect the government sales.
In fact, we believe that this change or one like it, would benefit EpiFix, because it would accelerate our capture of additional share of our competitors roughly $300 million portion of the advance wound care market. And as such we feel very good about 2014 revenue guidance in the range of $90 million to $110 million.
With that, I'll turn it back over to Pete.
Parker Petit: Bill, thank you and then we will flip it to Mike Senken, our Chief Financial Officer. Mike?
Michael Senken: Thanks, Pete. The company recorded revenues for the second quarter of approximately $13.5 million, an increase of 177% or $8.6 million over prior year second quarter revenue of $4.9 million. Revenue for the six months ended June 30, 2013, was approximately $25.1 million as compared to $8.6 million for the same period in 2012, representing a 192% increase over prior year.
Broken down by therapeutic area, in the second quarter and on a year-to-date basis, 54% of sales volume was wound care, 41% surgical and sports medicine, and 5% other. Wound care revenue for the quarter was approximately $7.3 million as compared to $321,000 in the second quarter of 2012. Surgical and sports medicine revenue for the quarter was approximately $5.6 million as compared to $3.7 million in the second of 2012.
For the six months ended, June 30, 2013, wound care revenue totaled approximately $13.6 million, which represents an increase of $12.1 million or 812% compared to $1.5 million in 2012. Surgical and sports medicine revenue for the six months ended June 30, 2013 was $10.2 million, an increase of 80% when compared to the prior year revenue of $5.7 million.
The increase in wound care revenue over prior year is driven by several factors including the move to a direct sales force model for both government accounts and commercial accounts. As a reminder, the company's targeted government accounts with a direct sales force beginning in July of 2012, and we continue to add resources in selectively markets as Bill described earlier.
Beginning late in 2012, but ramping up more aggressively in 2013, the company has been building a direct sales force where commercial accounts added specifically to territories where the company has received positive reimbursement decisions from the MAC. The increase in surgical and sports medicine revenue was driven by increased demand for the injectable platform in both government and commercial markets and AmnioFix graph for various surgical applications.
Overall, government sales represent 61% and commercial sales represent 39% of total second quarter revenue. On a year-to-date basis, government sales represent 63% and commercial sales represent 37% of total revenue. We would expect the commercial sales percentage to continue to increase over the balance of the year.
Gross margins for the quarter were 84%, as compared to 77% in the second quarter of 2012. The improvement was driven by the higher percentage volume in Wound Care, which is sold on a direct basis versus surgical and sports medicine, which is predominantly sold through distribution.
For the six months ended June 30, 2013, gross margins were 84% compared to 76% for the six months ended June 30, 2012, due to product and customer mix. The company reported positive adjusted EBITDA for the sixth consecutive quarter. To remind everyone again, adjusted EBITDA is earnings before interest, taxes, depreciation and amortization with the additional adjustment being share-based compensation, acquisition related earn-out provision, as well as intangible asset impairment charges, which are all non-cash expenses.
Included in today's press release is the supplemental disclosure that reconciles our reported net income to adjusted EBITDA. The company reported positive adjusted EBITDA of approximately $1.2 million for the quarter ended June 30, which is $240,000 improvement, as compared to an adjusted EBITDA of $923,000 in the second quarter of 2012.
Year-over-year improvement in adjusted EBITDA is a result of higher sales volume and improved gross margin. Year-to-date the adjusted EBITDA improved to approximately $2.3 million, compared to $1.2 million in 2012, which represents an increase of $1.1 million, which was driven by increased sales volume. As Pete mentioned earlier, the company continues to invest in infrastructure to support our growth. Total headcount increased by 14 in the quarter to 202, including the addition of five people to the direct sales organization.
Research and development costs were 7% of revenue and in line with our plan. R&D spending increased approximately $421,000, as compared to the second quarter of 2012, due to increased investments in scientific studies, clinical trials and patent legal costs all of which represent key investments, which will position us for future growth.
For the six months ended June 30, 2013, R&D spending of approximately $2.2 million, which is a 9% of revenue, represents an increase of $1.3 million, as compared to prior year. The increase in spending is related primarily to clinical trial expense. It should be noted that R&D expense is expected to increase in the second half of this year as the company accelerates its investment in clinical studies in Wound Care, sports medicine and other surgical applications.
Again, most of those studies are related to reimbursement and physician education purposes and will support our overall growth objectives. SG&A expenses were $10.9 million, as compared to $3 million in the second quarter of 2012. The increase was driven by the move to a direct sales force for Wound Care in both the government, as well as commercial markets going from no direct sales personnel in 2012 to 56 at the end of the second quarter of this year.
The company also continues to make investments in infrastructure to support the rapid revenue growth in areas such as marketing, trade shows, customer service, reimbursement, IT, accounting, legal and facilities.
For the six months ended June 30, 2013, SG&A expenses were $19.2 million, compared to $5.7 million in 2012. The net loss for the second quarter was approximately $757,000 or a loss of $0.01 per diluted common share as compared to the reported net loss of $744,000 or a loss of $0.01 per diluted common share for the quarter ended June 30, 2012. The net loss for the six months ended June 30, 2013 was approximately $2.4 million or a loss of $0.03 per diluted common share compared to a net loss of $1.8 million or $0.02 per diluted common share in 2012.
Included in the six-months loss is a non-recurring non-cash related charge of approximately $1.3 million, related to the acceleration of recorded financing expenses from the conversion of approximately $5 million of senior secured promissory notes during the quarter. Excluding this one-time item, the net loss would have been approximately $1.1 million.
In addition to the items previously mentioned, the net loss for the quarter includes a total of approximately of $1.9 million in non-cash related expenses, including $1.5 million in share-base compensation expense, $268,000 in amortization of intangibles and $139,000 in depreciation expense.
For the six months ended June 30, 2013, the net loss includes a total of approximately $3.3 million in non-cash related expenses, including $2,487,000 in share-based compensation expenses, $530,000 in amortization of intangibles and $238,000 in depreciation expense.
Turning now to the balance sheet, the company reported approximately $22 million in total current assets, including $4.2 million in cash, $11.8 million in accounts receivable, and $4.2 million in inventory. The increase in accounts receivable was the result of the higher sales volume including increased revenue to new commercial wound care customers, which ramped up towards the back half of the quarter.
We decided to further increase our inventory in anticipation of the facility move that occurred later in the quarter, as well as the higher revenue expected in the second half of the year driven by further penetration into wound care accounts.
The company reported $6.1 million in current liabilities, including $1.8 million in accounts payable and $4.3 million in accrued expenses and other current liabilities. The current ratio as of June 30, 2013 of approximately 3.51 is slightly lower than the ratio at December 31 of 3.57. As Steve mentioned earlier and previously disclosed in an 8-K filing the company secured a revolving line of credit of up to $3 million with Bank of America in support of our working capital needs.