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Edited Transcript of MDXG earnings conference call or presentation 26-Jul-16 2:30pm GMT

Destin Jul 27, 2016 (Thomson StreetEvents) -- Edited Transcript of MiMedx Group Inc earnings conference call or presentation Tuesday, July 26, 2016 at 2:30:00pm GMT

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Corporate Participants

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* Pete Petit

MiMedx Group Inc. - Chairman, CEO

* Bill Taylor

MiMedx Group Inc. - President, COO

* Chris Cashman

MiMedx Group Inc. - CCO

* Mike Senken

MiMedx Group Inc. - CFO

* Mark Landy

MiMedx Group Inc. - VP

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* Mike Matson

Needham & Company, LLC - Analyst

* Bruce Jackson

* Joe Munda

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the MiMedx Group Second Quarter 2016 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Thornton Kuntz, Senior Vice President of Administration. Sir, you may begin.

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Thornton Kuntz, MiMedx Group Inc. - SVP of Administration [2]

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Thank you, operator, and good morning, everyone. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to risk 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, 2015, and our most recent 10-Q. We do not undertake to update or revise any forward-looking statements, except as may be required by the company's disclosure obligations and 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.

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Pete Petit, MiMedx Group Inc. - Chairman, CEO [3]

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Thank you, Thornton. Good morning, and thank you for joining us for our second quarter conference call. I have with me this morning Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer; Chris Cashman, our Chief Commercialization Officer; and Mark Landy, one of our Vice Presidents, who has just joined us from his most recent career as an analyst on Wall Street. There are certain other corporate executives with us in the room.

I want to begin this morning with some comments about our current stock price and market valuation. In my personal opinion, in some Wall Street firms, we've become not just undervalued but very undervalued. This time last year, when our stock was $12 and touching $13, I stated at that time and I thought we were becoming overvalued. Today, I'll reiterate that I feel we are very undervalued. At the same time, the biotech and Biomet industries were generally down 40% from where they were a year ago. When we had $1 billion on market cap, our shares were aggressively purchased by numerous biotech EPS and indices and in addition, by some of the S&P indices.

Most of these biotech indices contain companies that are very immature in their state of development. Often, they do not have revenues, much less profits. If they do have revenues, they do not have the growth profile that MiMedx has. Therefore, they're viewed by the Street as risky investments.

However, MiMedx has a solid five-year track record of growing revenues quarter-over-quarter and showing positive EBITDA for over 18 quarters. During that period, we repurchased approximately $50 million of our shares in the open market. And these indexes and funds, I believe, will certainly be classified as being a top 5% in terms of financial and operating performance. However, we're just one stock in that broader Market Basket. Our stock price will be moved around as the Market Basket price rises and falls in value.

In addition, we're still detecting a certain amount of short selling that seems to be very focused in the last few weeks. We believe we finally found a means to track the illegal short selling, namely naked short selling in a very accurate fashion. From this point forward, we will be tracking that on a daily basis and we'll take steps to address any illegal activity identified. Some other companies have been effective in using this new technology and we will also be relentless in shining a light on any of the illegal short selling that is occurring. If there are damages, we will pursue the necessary means to obtain remuneration.

Management will continue to attend financial conference and do the non-deal roadshows to be sure that the investment community fully understands the value of our assets. Now we fully recognize that we are temporarily in the penalty box because we slightly missed revenue estimates in the first quarter. However, we've done exactly what we told our shareholders we would do in terms of resetting this year's expectations and in the second quarter, we started our progress again, by exceeding our revenue estimate.

Now some brief comments on our second quarter financial performance. First, we exceeded our revenue forecast. However, I am sure you're concerned since we reduced our annual EBITDA operating profit and EPS forecast. As I've stated many times, management controls operating profit levels. When we see very promising investments in our various operating units, new products, clinical studies, intellectual property, we're prone to make those investments. Otherwise, we will not optimize our opportunities. However, I believe we should still be quite able to achieve a very respectable EBITDA margin in the vicinity of 20% this year.

Let me reemphasize something I have discussed numerous times previously. As I've just stated, the decisions that drive our EBITDA operating profit and earnings per share are generally made by management, often on a quarterly basis. I've asked shareholders focus on gross profit margin, because those are the financial performance measures that management has less control over.

If there are industry or other endemic issues with our business, they will show up in our gross profit margins, which would be an issue of concern. However, the slight change you've seen this year in gross profit are related to our Stability Biologics acquisition. We're bringing their production efficiencies up quickly and we do not expect to see significant continuing deterioration in our gross profit margins.

Therefore, when you focus on our operating profits or EPS, keep in mind that we will continue to make investments to build our asset base and revenue base at a rapid rate. We have significant opportunities for growth, but we must keep our management systems and initiatives ahead of when they will be needed.

Remember, we do not make these investments. If we do not make these investments at this point in our growth, we're not going to have the huge returns that we expect. Generally, these returns should be triple digits in the first year or so. We also intended to continue to build the very valuable assets that we will have assembled and nurtured over the last five years.

I've submitted to you -- if you will just review our quarterly revenue charts, this type of performance cannot be achieved without an effective focus from management on just these types of issues. We do not have cash issues. We do not have any debt. We will continue to build cash and we will be managing our cash flow and EBITDA carefully. Again, recall we purchased almost $50 million of our shares back in over the last two years. We will continue to do so.

One other very pertinent issue that I would like to discuss is our forthcoming patent lawsuit. We're scheduled to be in court this fall with our first trial. There's a possibility the second case will also be ready for trial this fall. We have confidence in our cases, because of how they have progressed in regards to our flagship patents. Bill Taylor will explain some of that detail in a few minutes, but we've gone through the IPR process with those patents very successfully and we believe it should bode well for us as we go into the actual trials.

If we obtain favorable decisions that will put us in a position to seek injunctive relief from not only the defendants we have sued in these cases, but also from the other individual business entities that are violating these patents. Please realize that some of these competitors, while they are still small, have accumulated revenues over the years that are substantial. Many of these organizations were notified several years ago about their potential violation of our patents. But since they know that and they continue to violate our patents, they could be subject to triple damages.

You saw our press release on Monday morning relating to our first two new product lines. We will discuss the second in the next few weeks. We have our CollaFix product line in production and moving through the regulatory approvals. We have some exciting new product concepts in the cardiology and respiratory areas of medicine. MiMedx is and will remain the unquestioned leader in (inaudible) regenerative medicine. These are exciting times for the company and we intend to re-convey that to shareholders and Wall Street.

Okay. I'll turn it over to Bill Taylor. Bill?

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Thanks, Pete. I would like to echo what Pete said, the second quarter is a very solid quarter for MiMedx and we recovered very nicely from the operational issues we had in the first quarter. On the call today, I'll address several different areas of progress.

First, related to our sales force, I'm happy to announce that we have eclipsed the 280 mark on our field sales force. Our total was just over 280 sales professionals, noticeably larger than where we were on our last shareholder call and this is one of our key investment areas. Our split is roughly 230 people in Wound Care and just over 50 people in SSO. As we continue to evaluate the U.S. Wound Care market, we are consistently finding a tremendous amount of growth opportunities.

As recently reaffirmed by the independent business intelligence service company, BioMedGPS, MiMedx has the market-leading position in the U.S. Wound Biologics market, subsegment of CTPs, cellular and/or tissue-based products for skin and dermal substitutes, and with our market share at about 26.4% of the overall CTP market during the first quarter of 2016.

Our internal analytics department has recently compiled data from third-party aggregators and identified a substantial number of target Wound Care opportunities that, if we do a reasonable job converting many of those accounts, we should continue to see approximately 25% growth in Wound Care for the next several years. The analysis was very enlightening to us and that there is a lot more low-hanging fruit remaining out there. So this is very exciting for us.

Our growth in the SSO area was also quite satisfying in the second quarter. We have a tremendous opportunity to introduce our innovative regenerative products into new surgical and therapeutic applications. Our clinical and informatics team are working with physicians and facilities to model clinical use and effectiveness of our technologies, which is critical particularly with the pressure on our healthcare system today and in the future.

Unlike devices or allografts that simply address a functional issue, we're finding ways that our technologies can be used in more of a therapeutic function, not only providing clinical efficacy but also our cost efficient and they can improve quality of life functions. This is a focus area of some of our research and development initiatives and we expect new therapeutic products to come out of these initiatives.

In the future, we feel these health outcomes will become more critical, because new technologies cannot function -- if new technologies cannot function in this manner, we're going to have a difficult time being successful based on changes in reimbursement down the road.

Now Pete had discussed some of our increased investment areas, and I want to highlight some of our clinical study advancements. At present, we have about 24 active clinical studies and another dozen or so that are under consideration and/or being contracted and designed right now. They range from small 20-patient prospective case series to large multicenter 200-plus patient-randomized control trials. Among these studies is our IND study for plantar fasciitis with our micronized product. We're at the halfway point on this study and are preparing to conduct the interim analysis on it as per our protocol.

We've completed enrollment on a 60-patient OrthoFlo study and 90- and 180-day data points are expected to be completed in the fourth quarter of this year and in the first quarter of 2017, respectively. We also have a number of additional studies underway that focus on other specific surgical procedures. As those studies progress towards completion and publication, we'll discuss them in more detail.

On the intellectual property front, we are now at about 29 placental tissue patents issued and allowed. Overall, we have nearly 80 patents issued and/or allowed and over 120 pending. Our IP portfolio is one of our strongest assets and that's why we are investing not only in strengthening it, but also defending it. As you know, there are several companies who have tried to emulate our success, many of whom appear to have infringed on our patents. We now have four patent lawsuits going and we've kept you apprised of our progress with those lawsuits.

I know it's been a long road to get to where we are, but we can now see some light at the end of the tunnel. We expect to have our first patent trial this fall, with the second following shortly thereafter. While litigation is always uncertain, we are confident in our position, particularly in light how the case overall has progressed so far.

To that end, you will recall that two key patents for EpiFix and AmnioFix were challenged with an inter parties review process. We successfully overcame both challenges without any equivocation. And should we prevail on our first patent trial, what follows will be somewhat interesting. Besides any potential damages that could be awarded to MiMedx, a win should prove to be a major deterrent for other companies insofar as the injunctive relief against future infringers should more readily and easily be obtained. All in all, our competitors should not just be taking heat of our current cases, but also of the numerous patents and patent applications, which make up our portfolio. It will come as no surprise to anyone that MiMedx will vigorously defend against copyists as well as those who improperly try to trade on MiMedx's good name in the industry.

On the international sales front, we continue to drive our sales expansion and have expanded our tissue use internationally, particularly with EpiFix. We have focused international sales efforts in Canada, the U.K, Italy and Switzerland among other countries and focused regulatory efforts in Germany, Japan and Australia, where we have a target to be selling within the next 18 months or so.

In May of this year, our team exhibited the European Wound Management Association meeting in Bremen, Germany. We had great booth traffic and well attended some symposiums that we, MiMedx, sponsored. This September, we are exhibiting in the World Union Wound Healing Society meeting in Florence, Italy, and we'll be interacting with multiple clinicians there from around the world as well.

With that, I'll turn it over to Chris.

Chris Cashman, MiMedx Group Inc. - CCO [5]

Thanks, Bill, and good morning. We are extremely pleased with the progress that we made in the second quarter, as we grew revenues in both our market focuses of Wound Care and SSO. We continue to make significant investments in the sales organization as we've expanded our focus into surgery and the expansion of the ortho, sports med and spine agency network.

Focusing on wound first. We continue to make significant investments in our sales force, supporting clinical studies and our support teams in the contracting and field reimbursement specialist teams. We continued the expansion of our revenues, showed robust growth in all focuses, including hospital, wound care centers and physician office. I'd also like to add that we made good progress in the burn area, as we have expanded our portfolio to include cryopreserve, split-thickness skin called AlloBurn to complement our EPIBURN product line.

As Pete mentioned, federal Wound Care revenue was lower than expected due to a Department of Veterans Affairs directed to all hospitals covering the implant procurement process nationally. A preauthorization process for purchasing implants was developed and implemented. However, it had caused confusion across hospitals both in its interpretation as well as in the purchasing and consignment signatory processes and procedures. These issues are now generally resolved in all but a few hospitals.

Turning to SSO, we made a significant investment in hiring surgical representatives in the mid-to-late first quarter to focus on abdominal and pelvic procedures. Over half of the direct surgical sales people were new to MiMedx at the end of Q1 or they started or trained in April of Q2. Many of these territories are built from scratch. So we have made the required investment ahead of the revenue and are truly taking the appropriate steps in these greenfield areas to engage, train, educate, go through VAC committees and conduct evaluations that will lay the basis for accelerating revenues in the months to come.

Last quarter, we shared that we had three main reasons that caused us to fall short in our revenue against guidance. These were the introduction of the SMS business planning system, the integration of Stability Biologics and the realignment of sales management and organizational...


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