Earnings Call Transcript - MDXG Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MiMedx Fourth Quarter 2020 Operating and Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jack Howarth. Thank you. Please go ahead, sir.

Jack Howarth, Speaker

Thank you, Operator, and good morning, everyone. Welcome to the MiMedx fourth quarter and full year 2020 operating and financial results conference call. With me on today's call are Chief Executive Officer, Tim Wright, Chief Financial Officer, Pete Carlson, Executive Vice President and Chief Commercial Officer, Dr. Rohit Kashyap, and Executive Vice President of Research & Development, Dr. Robert Stein. Tim and Pete will provide a summary of operating and financial results for the fourth quarter and full year 2020, and at the conclusion of their remarks, Tim, Pete, Dr. Kashyap, and Dr. Stein will be available for your questions. Before we begin, I would like to remind you that comments made during today's call include non-GAAP financial measures, and we provide reconciliation to GAAP in our press release, which is available on our website at www.mimedx.com. Also, our comments today will include forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, actual outcomes and results are subject to risks and uncertainties and may differ materially from those anticipated due to many factors. Listeners are directed to the cautionary notes in the press release issued yesterday, as well as the Risk Factors set forth in MiMedx 2020 Annual Report on Form 10-K for factors that could cause actual outcomes and results to differ materially from those reflected in the forward-looking statements. The company assumes no obligation to update or supplement any forward-looking statements, except as required by law. With that, I'm now pleased to turn the call over to Tim Wright. Tim?

Tim Wright, CEO

Thank you, Jack. Good morning, everyone, and thank you for joining us. 2020 was a foundational year for MiMedx. We focused on a number of operational and financial initiatives in order to move the company forward in its transformation, propel its pipeline, and regain momentum. Before I get into 2021 strategic initiatives, let me review some of the many accomplishments from last year. First, let me talk about the efforts to restore the business and our accomplishments there. We’ve recruited experienced high-integrity leaders with subject matter expertise across the board. We've converted 90% of our executive and senior management during this period. We also did an excellent job of reconstituting the board, focusing on improved governance, diversity, and expertise. We're also pleased to announce that Dr. Phyllis Gardner is joining our board. Dr. Gardner is recognized for her contributions and accomplishments across academia, biotechnology, and the healthcare industry. She is a professor of medicine at Stanford University School of Medicine and a distinguished business leader, bringing over 35 years of experience to the company, marked by numerous national awards and honors. She has conducted extensive research in cell biology and gene therapy, as well as being widely published in the fields of cell biology and pharmacology. Her insight, perspective, and strategic expertise, combined with our existing board, will be invaluable as we propel our late-stage pipeline towards biologic registration and guide MiMedx into the future of regenerative therapeutics. The efforts to restore our business start with getting current on our financial reporting. In addition, we’ve raised the needed capital of $150 million through financing led by EW Healthcare. Also, an important aspect of restoring the business is relisting on NASDAQ on November 4. In addition to restoring the business capability and capacity, while creating long-term value for shareholders, we completed Knee OA enrolment of our Phase 2b study and Plantar Fasciitis enrolment in a Phase 3 study. We launched a new product out of our Epicord franchise called Epicord Expandable. This offers the potential to provide physicians and patients with expanded boom coverage economically. In addition, we’ve received EpiFix diabetic foot ulcer coverage from the largest U.S. commercial payer. 2020 was a busy year. I'm proud of everything that we accomplished, and now we're in a position to begin really focusing on the operating aspects of our business and investing in growth. We are pioneers in using birth tissue as a platform for regenerative medicine, and we believe our biologics pipeline in our advanced wound care business will create extraordinary value for our shareholders. Our primary goal is twofold: improve access and utilization of wound care products and, by doing so, grow our top line by over 10%; and accelerate our novel late-stage pipeline of regenerative medicine. In addition to those two primary objectives, we have reorganized, reincentivized, and reinvested in our sales force to capture momentum and support the growth of our core wound care business. We're also confident about completing the registration process for EpiFix in Japan, where we anticipate receiving registration approval in mid-2021. This presents another attractive growth opportunity for MiMedx. These are very exciting times for our company. Now let me give you an overview of two very impressive pipeline assets. The first pipeline opportunity is Plantar Fasciitis. Our Phase 2b study was completed and demonstrated a 76% reduction in pain versus control at three months. We've completed enrolment of our Phase 3 study, which included 277 patients in September of 2020. Our last patient out is anticipated to be in Q2 2021. We estimate on filing our BLA in the first half of 2022, and we plan to accelerate that, aiming to file in the late fourth quarter. We anticipate FDA approval and product launch to occur no earlier than the fourth quarter of 2022 or later in the first half of 2023. The market for plantar fasciitis has been articulated before in some of our calls, with approximately 2 million patients treated annually for PF, and about 10% of those patients being recalcitrant, requiring advanced therapies like corticosteroids. In the first year, we believe potential candidates for an injection of our AmnioFix product will be around 20,000 to 50,000 patients, considering the lengthy recovery from chronic plantar fasciitis and the high recurrence rate. Our second pipeline opportunity is knee osteoarthritis, a very significant unmet need. We completed our enrolment in our Phase 2b trial in September as well, enrolling 447 patients. The last patient out for the six-month blinded observation will be late 2021. The trial includes a six-month open-label extension that allows patients the option to receive micronized dHACM or AmnioFix. It's important to note several enabling factors afforded by filing our plantar fasciitis registration. One, we're advantaged by GMP readiness from PF. This means we don't have to go through that process again with the agency. The company was first to receive RMAT designation, facilitating more frequent dialogue around clinical trial protocols and surrogate endpoints, as well as opportunities to discuss our manufacturing process and release criteria. The current timeline to market is as follows: we'll be meeting with the FDA in mid-2021 to review our Phase 2b trials, present our Phase 3 protocol, and we plan to initiate our Phase 3 trial in the first half of 2022, if not sooner. We would then anticipate a BLA filing in the second half of 2024 or the first half of 2025 and FDA approval in the second half of 2025 or the first half of 2026. Both pipeline opportunities offer exciting potential to create value for our shareholders, and more importantly, for patients suffering from these issues. The knee osteoarthritis market is significant, approximately growing at 2% a year off a base of 17.5 million patients. Today, around 4.4 million patients are being treated with intra-articular injections, with about 8.8 million injections per year. We believe based on our labelling, we could treat 1 million to 1.5 million patients annually if the efficacy is proven in our Phase 3 trial, representing a very important new tool for physicians to treat osteoarthritis. Shifting to our commercial organization, we have redesigned the organization and reincentivized them to focus on distinct areas of promotion with products that target DFUs and VLUs. Our robust commercial infrastructure is supported by an expanding medical science liaison program, clinical evidence, and improved reimbursement. Today, we cover over 300 million lives, and we currently have multiyear contracts in place with the largest GPOs and IDNs to support our efforts.

Pete Carlson, CFO

Thank you, Tim, and good morning, everyone. Today, I will discuss our fourth quarter and full year 2020 results and comment on some of the underlying trends we are seeing in the business. First, I'd like to reiterate some of the achievements MiMedx accomplished in 2020. As a company, we are working to restore our financial reputation to support the continued delivery of products that make a difference in the lives of patients and their families. Many of us have seen the impact that our PURION engineered technology can have as an advanced treatment option for hard-to-heal acute and chronic wounds. Our 700-plus employees are dedicated to delivering the level of quality and excellence our customers deserve, and I appreciate the team's commitment to elevating the standard of patient care. In 2021, we are increasing our investments in both parts of our business: our core advanced wound care portfolio and our late-stage pipeline. All amniotic tissue products are not the same, and we believe our differentiated platform is positioned to exceed market growth. Recent efforts in our commercial organization position us for this growth in the coming year. We currently have 265 sales personnel and plan to increase that number by 10% or more in 2021, along with aligning territories to ensure we have the right people in the right places. The team is leveraging recent coverage by the largest U.S. commercial payer for EpiFix, our flagship brand, as a proven and medically necessary treatment option for diabetic foot ulcers. We're also increasing our medical education efforts and personnel to enhance our customer relationships. Returning to 2020 results, I would note that the impact of the company's transition in revenue recognition methodology on quarterly results is now behind us. However, I do want to clarify the impact on our reported full-year results. Net sales for the full year ended December 31, 2020, were $248 million, primarily recognized on an as-shipped basis, compared to $299.3 million for 2019, primarily recognized on a cash-received basis. Net sales for 2020 and 2019 include the benefit of $7.8 million and $29.6 million, respectively, from the change in revenue recognition methodology. Adjusted net sales, excluding the impacts of the company's transition in revenue recognition, were $240.5 million in 2020, an 11% decrease from 2019. This decrease primarily reflects access restrictions, decreases in elective procedures, and cost-saving measures implemented by hospitals as a result of the COVID-19 pandemic. When looking at a breakdown of our tissue and umbilical cord products, this decline is much less in 2020 compared to 2019. This trend can also be seen in our quarterly results; reported adjusted net sales for the fourth quarter are flat compared to the same period in 2019. Excluding the impact of out-of-period approvals in the fourth quarter of 2020, adjusted net sales are down slightly, while our tissue and umbilical cord products are up slightly in that period. Gross margin in the fourth quarter of 2020 was 84.2% compared to 83.4% in the fourth quarter of 2019, reflecting improved manufacturing efficiencies and lower levels of scrap. For the full year 2020, we saw a slight gross margin decline from 85.6% in 2019 to 84.2% in 2020, largely due to the higher quality standards of current good manufacturing practices we've implemented since the second half of 2019. SG&A for the fourth quarter of 2020 was $48.7 million, an increase of 7.2% compared to the fourth quarter of 2019. Spending on corporate initiatives and non-executive stock-based compensation contributed to this increase for the quarter. For the full year, we saw a decrease in SG&A, driven in part by the company’s efforts to manage expenses in response to the COVID-19 pandemic, including a temporary salary reduction and travel restrictions. Research and development expenses were $3.4 million for the fourth quarter of 2020, compared to $2.7 million for the fourth quarter of 2019. For the full year, R&D expenses were $11.7 million in 2020, compared to $11.1 million in the prior year. Consulting fees related to clinical research efforts drove this increase. We expect R&D costs to increase significantly in the coming year. This investment supports our future growth objectives, as Tim outlined it, although the amount may vary based on the results of our clinical study readouts in the second quarter of this year. We plan to continue working towards filing our biologic license applications, filing new or additional investigational new drugs in the first half of the year, and publishing further clinical and scientific research, including efficacy and economic data. Investigation, restatement, and related expenses for the fourth quarter of 2020 were $20.4 million, comprising costs incurred under indemnification agreements with the company’s former management and directors and costs related to certain legal matters. For the prior year period, these expenses totaled $20.1 million. For the full year 2020, investigation and related expenses were $59.5 million compared to $66.5 million in 2019. In 2021, we expect significant declines in these expenses. The Audit Committee investigation was completed in mid-2019, and the restatement was also completed in mid-2020. As such, we do not expect to incur related expenses going forward. Additionally, we are not currently incurring advancement and indemnification expenses for the former CEO and COO, as judgments of conviction have been entered against these individuals. Turning to the bottom line, net loss for Q4 2020 was $16.6 million compared to a net loss of $7.5 million in Q4 2019. Net loss for the full year 2020 was $49.3 million, which includes an $8.2 million loss on extinguishment of debt and a $6.7 million benefit from the change in revenue recognition. Adjusted EBITDA was $10.3 million in Q4 2020 compared to $14.1 million in Q4 2019. For the full year, adjusted EBITDA was $30.6 million or 12.7% of adjusted net sales, compared to $42.1 million or 15.6% of adjusted net sales in the prior year. Now let me review our cash position. As of December 31, 2020, the company had $95.8 million of cash and cash equivalents, compared to $69.1 million as of December 31, 2019. Our healthy cash position gives us the flexibility to invest in initiatives that strengthen our core business and support R&D activities. Looking to 2021, we expect our adjusted net sales to increase 10% or more over the prior year, assuming we are able to sell our micronized, particulate, and umbilical cord products for the full year. Actual results may differ materially, and there are some caveats as indicated. Regarding our micronized and particulate products, if these are required to be removed from the market following the period of enforcement discretion, we estimate the negative impact on our expected 2021 net sales could be in the range of $20 million to $25 million. Our dialogue with the FDA continues, and we expect to gain additional clarity on the full impact and timing of enforcement discretion in the coming months. While we are optimistic about our 2021 growth potential, I remind you that we are still in the midst of the pandemic, and local or regional surges of COVID-19 continue. We know that chronic non-healing wounds are not improving without treatment, and our commercial team is positioned to address the needs of this patient population. In closing, we continue our outreach efforts and dialogue with investors and analysts. Another benefit of our NASDAQ listing is the increased opportunity to participate in industry conferences, and we're pleased to share our story with the financial community. I will now turn the call back to Tim.

Tim Wright, CEO

Thank you, Pete. Looking forward, our focus for the company is on our growth drivers for 2021. This includes a focus on R&D, operations, and commercial initiatives. We plan for the second half of the year to do an interim data readout and accelerate our late-stage pipeline, particularly for the PF application. We will also accelerate our Phase 3 clinical trial for Knee OA into the first half of the year. Our medical affairs organization in R&D will continue to publish peer-reviewed articles that are clinically and scientifically oriented, as well as economically focused. Additionally, we plan to file new INDs in 2021 to continue to advance scientific rigor in this category, significantly benefiting patients. Moving to operations, we plan to validate our manufacturing facilities to a current good manufacturing practice standard, while ensuring a fulfillment rate above 95%. From a commercial perspective, we aim for a top-line growth of 10%, expanding our sales force by 10%, supported by medical affairs. We are hopeful for receiving Japanese approval mid-year and reimbursement approval for our products by year-end. Moreover, we are continuously evaluating organic growth opportunities within our R&D and product development organizations. We are focused on investing in our core business for expanded growth and are committed to accelerating our pipeline. Thank you for listening today. Operator, can you now open the lines for questions?

Operator, Operator

Thank you. And our first question comes from Sean Kang with H.C. Wainwright. Your line is now open.

Sean Kang, Analyst

Hi. Thanks for taking my questions. So my first question is, how confident are you that the FDA might allow you to continue marketing your micronized product for the full year in 2021?

Tim Wright, CEO

Hey, Sean, that's a great question. It's hard to anticipate exactly where the FDA is going to land on that. I don't have a crystal ball. However, over the last 18 months, we've had communication with them about our manufacturing facility's transition to GMP, as well as ongoing clinical trials and plans to file new INDs. I believe this aligns well with the agency’s expectations.

Sean Kang, Analyst

I see. And also, how much of a pandemic impact do you expect for 2021? Hopefully, things are getting better with the vaccination program. What is your plan to mitigate potential risks?

Pete Carlson, CFO

Sean, it's Pete Carlson. We haven’t provided specifics about the first quarter relative to expectations. There continues to be local and regional impacts. It’s more isolated than what we observed 10 months ago. We did see some loss of time due to severe weather, particularly in Texas, which has a high population and diabetes incidence. However, we haven't given any specific forecasts.

Sean Kang, Analyst

Okay, that's good. One last quick question. Is there any data readouts from the pipeline products for this year?

Pete Carlson, CFO

Yes, indeed. There will be readouts coming in the first half of the year on all three trials we have in the musculoskeletal area.

Robert Stein, EVP of Research & Development

Yes, Pete. We'll complete the last patient out of our Phase 3 studies for plantar fasciitis and Achilles tendonitis in the first half of the year. We will be processing and analyzing the data probably for about a quarter. We plan to meet with the FDA to discuss these results, and we're looking forward to those outcomes. The Knee OA trial, the last patient will complete the six-month blinded observation period around the same time as the other two Phase 3 trials. We'll also have a six-month open-label extension the FDA requires, and we will progress that program as rapidly as possible. We have RMAT designation for that product, and will be engaged in discussions with the FDA about the results.

Sean Kang, Analyst

Okay, thank you. That's very helpful.

Operator, Operator

Thank you. Our next question comes from John Vandermosten with Sci Zacks. Your line is now open.