Good evening. Thank you for standing by. Welcome to the MiMedx conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Notarianni. Please proceed.
Thank you, Camilla. Good evening, everyone. Thank you all for joining us on short notice. With me on today's call are Chief Executive Officer, Joe Capper, and Chief Financial Officer, Pete Carlson. A short while ago, we issued a press release announcing a strategic realignment of the company. Additionally, we have a slide presentation covering today's announcement, which can be accessed on our investor relations website at mimedx.com. For today's call, Joe will kick us off with some remarks about this news. Then we will be available for your questions. A replay of this call will be available on our investor site for approximately 30 days as well.
Before we begin, I would like to remind you that our comments today will include forward-looking statements, including statements regarding future sales growth, future margins and expenses, expected market sizes for our products, and potential timelines for clinical trials and FDA submissions and review. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual results, market sizes, timing, and FDA review will depend on a number of factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays, the results of our clinical trials, our interpretation of those results, 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 and our quarterly reports on Form 10-Q. Our comments today include non-GAAP financial measures. With that, I will turn the call over to Joe Capper. Joe?
Thanks, Matt. Good evening, everyone. I will keep my prepared remarks relatively brief so we can take your questions. Today, we're announcing a strategic realignment that commences a new chapter for MiMedx, one that brings greater focus within the organization as it solidifies our intent to expand the wound and surgical business. As such, we are announcing the suspension of our knee osteoarthritis development project, effective immediately. We expect this move will dramatically improve our financial profile and provide enhanced flexibility to support our growth initiatives. I realize this may come as a surprise to some of you in the investor community who had a particular interest in this program, and certainly to those of you within the organization who are directly impacted. I want to assure you that this was a decision that was not made lightly and only after thoughtful deliberation.
Let me start by providing some background as to how we came to this decision. As was previously announced, the company engaged the assistance of a strategic advisor last year to help us determine our most impactful path forward. Naturally, when I joined the company nearly five months ago, I made it a high priority to conduct a strategic review of the business. The KOA program was of particular interest, given the numerous hurdles it faced, lengthy timeline to commercialization, and significant capital needs measured against the product's long-term potential. Over the months, we worked closely with our advisors to assess the potential market opportunity, a variety of risk factors, the cost, the timeline, other potential challenges, and our ability to attract an investor or strategic partner as an alternative to funding the project on our own.
Here is what we concluded: We have great confidence the product is safe and effective. We have a highly skilled group of people working on the project, along with excellent external partners, and there is most assuredly a large unmet need for more effective K OA solutions. We also concluded that this project has considerable risk associated with it. The regulatory environment is particularly uncertain, and the time it would take to get to market remains unclear. As a result, we could no longer justify this sizable multiyear investment. This was particularly true when measured against other opportunities before us. In the final analysis, the risk simply outweighed potential rewards. I am certain that this decision is the right one for this company. I would like to express my sincere gratitude to all the members of the Regenerative Medicine Division who worked so diligently on the KOA project.
This decision was in no way a reflection of the work you were doing, nor was it a reflection on the safety and efficacy of our product. At no time were any of these things in question. Thank you for all of your contributions to MiMedx. Regarding the financial implications of today's decision, we estimate the one-time wind-down expenses to be approximately $5 million. On a pro forma basis, assuming the realignment had occurred on January 1, 2023, we expect that it would have added approximately $25 million of adjusted EBITDA for the full year 2023. This change will materially improve our operating margins and free cash flow generation, providing us with the ability to accelerate our existing growth plans. As I highlighted on our last two calls, our near-term success will be determined by how well we execute in three basic areas.
Our primary objective is to build on our leadership position in the wound and surgical markets by enhancing our product portfolio and expanding geographically. Our second growth objective is to develop opportunities in adjacent markets to create additional revenue drivers for the company. Third, we want to build a corporate discipline around expense management, rationalization, and continuous process improvement. Suspending the KOA investment is perfectly consistent with this plan and dramatically enhances our likelihood of success, particularly with the first two growth objectives. Given our expectations for future margins and free cash flow generation, this move will create more options for us to invest in our growth and accelerate a path toward value creation. The wound and surgical industry presents numerous untapped opportunities for growth. MiMedx is a pioneer in the field of placental biologics, and we believe we are the leading provider of amniotic skin substitute products in the US, providing a strong foundation from which to build.
We are committed to the relentless innovation of new products and to the generation of unmatched clinical and scientific evidence to support their use. Our two newest products are clear evidence that our R&D efforts continue to advance the science of placental biologics. We are also dedicated to improving access to our products with a large and growing patient population, both domestically and internationally. With clarity of focus, these are all areas to redouble our efforts. Since the second quarter is still ongoing, I will refrain from commenting on our operating performance. We are quite pleased with the progress the company is making to date, and as such, we are also using this occasion to raise our full year outlook for net sales growth % from the low double digits to the mid-teens.
We will cover the company's results in more detail on our second quarter earnings call in early August. We are highly confident that our business will continue to show improved margins with scale. In fact, in the second half of 2023, we should have an adjusted EBITDA margin approaching 20%. In closing, I would like to emphasize that I fully understand today's news is certainly difficult for the members of our team who are being impacted, but we would not have made this decision if we didn't strongly believe that it is in the best long-term interest of the organization, the patients we serve, and our shareholders. With that, I would like to open the call to questions. Operator, we are now ready for our first question. Please proceed.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question is from Carl Byrnes with Northland Capital Markets. Please proceed with your question.
Thanks for the question. One of the comments stated in the press release and also applied is this strategic realignment would provide you with additional financial flexibility. Are you kind of couching that with respect to potential near-term M&A opportunities or acquisition of complementary products for wound and surgical? Thanks.
We have a pretty active corporate development, kind of program slash funnel that we're building within the organization. I wouldn't say we're prepared to talk about anything publicly. You know, the increased flexibility that we talked about comes with a much improved financial profile, and certainly gives us, it gives us more options.
Great. Thank you.
Thank you. Our next question is from Bradley Bowers with Mizuho Securities. Please proceed with your question.
Hi. Thanks for taking our question here. I just wanted to kind of hear, you know, you said that there's incremental opportunity or investment. You know, I guess that kind of says that there's maybe some previous underinvestment. I wanted to kind of hear how much of the run rate savings is gonna be really falling through. You know, I appreciate the guidance on the back half margin, but also wanted to kind of hear if you could expand on the kind of programs or investment where you think you'd see the most focus. And I guess, you know, which of the lines, you know, we'd see the most savings. You know, I would imagine most of it will come out of R&D, you know, some SG&A, but any kind of color you can give on that. Thank you.
Yeah, I'll let Pete talk about the numbers associated with it. Just, as far as where we do best, I think stick to the strategic plan that we've already outlined. We think, there's a lot of opportunity to go deeper and wider in both wound and surgical. Surgical has a lot of opportunities. You know, some of that is ongoing already with internal product development and initiatives. We talked about the need for more clinical research in that space. There are areas that will increase our focus. Pete, why don't you touch a little bit on the numbers?
Yeah. Again, as Joe mentioned, what you're looking at is the Regenerative Medicine Business Unit going away. As you look across a year, that's where we think this $25 million in savings would come from. I will remind you that we talked about the clinical trial being a $20 million-$25 million cost per trial, and there were two trials we were having to look at, and then the regenerative medicine, you know, that was for the trials itself, and then the Business Unit had other projects going on as well as, you know, team members. That's where you get to that $25 million. We do think there is a strong, you know, obviously, that's a very impactful number to our bottom line, both in our performance metric of the adjusted EBITDA as well as at the net income level.
Got it. If I could do one follow-up here, you know, I appreciate the kind of the exit rate, 20% here. You know, I assume some fluctuation, should we expect, you know, not to give 2024, I guess, to put the cart before the lead, I mean, is that a margin that you think you could sustain? Or is that kind of a benefit from, you know, I guess, kind of the in-between of losing the Regenerative Medicine program and still kind of deciding where to allocate incremental spending on the rest of the business? That's all for me. Thank you.
Yeah, I don't think we're prepared to put a number like that, a hard number out for 2024. I think we have to see how the business continues to evolve. I will say that we're very pleased with the margin accretion that we're getting as the business scales. I expect to see that continue as the business continues to grow. You know, again, we'll have to watch and see, but very pleased with the leverage we're starting to get out of the business. A lot of that was steps that were taken last year coming into this year, so that the business is definitely operating more efficiently.
Pamela?
Thank you.
Yeah, thanks.
Our next question is from Swayamp akula Ramakanth with H.C. Wainwright. Please proceed with your question.
Thank you. This is RK from H.C. Wainwright. Just trying to understand on the savings part of it, the distribution of the savings. How big was the regenerative medicines unit of the, you know, within the entire company? Also, thinking about trying to focus just on the wound and surgical, does that mean you will take some of that savings and put it back into the wound and surgical division by either increasing additional sales personnel or maybe going to additional geographies so that you can, you know, you can start building that franchise into a stronger, into a stronger entity?
RK, I'm not really prepared to talk at a tactical level where we see investment opportunity for the business. Just in general, I will say that we are very pleased with the progress that is being made within the wound and surgical division. We think that the commercial organization is performing at a high level and we think there's continued opportunity for even greater improvement. The sales organization has went through quite a few changes over the last few years. They're starting to get really good traction in the marketplace. The leadership team has been in place a bit longer, but so we're seeing above average performance there. You know, we think that that's something that warrants more investment and potentially, you know, greater than we are today. Again, I'm hesitating because I don't want to really get into kind of, you know, tactical allocation of resources at this point.
Yeah. RK, it's Pete. You know, if you look at just the most recent quarter, the regenerative medicine segment, you know, usage, if you will, not contribution, was just about $5 million. As we've said, as the trial ramps up during the year, that cost, we had expected that cost to increase.
Thank you both. Thanks for taking my questions.
Thank you. Our next question is from John Vandermosten with Zacks Investment Research. Please proceed with your question.
Thank you, good evening, Joe, Pete, and Matt. For the KOA program, I mean, there's been a lot of work already done for it. Is your goal to potentially find a partner for that?
Yeah, John, I would say we would have loved to, right? Working with our advisor, you know, we did try to evaluate that as best as possible, and we were not able to generate interest. If somebody were to emerge in the very immediate future, we would love to have a conversation with them. It's just the project. Again, when we looked at all the risk factors, all the buckets of risk, if you will, and funding this on our own and the potential market, when we got there, it just didn't make any sense to go alone any longer.
Understood. With the cost of capital going up, you know, traditionally calculated discount rates have probably shifted some programs from positive to negative NPV. Was that part of the role? I mean, if we looked at this a year and a half ago or so, we may not have had the same decision?
Yeah, I don't know if we looked at cost of capital, but it was a factor.
It was one of many factors. There, over that last year-and-a-half period you referenced, a lot of the factors have changed. You really can't point to any one factor.
We spent a lot of time looking at the difference in the environment when went down this path 3+ years ago until today, and that, among other factors, changed quite a bit.
Got it. You know, another thing that came up in my mind was just the regulatory uncertainty, which, you know, compared to pre-COVID, is a lot different now. I mean, I think there are a lot of, a lot of submissions to the FDA and interaction with the FDA that got either delayed or pushed off or, and not approved. Maybe because they were bad products or whatever, but just because the FDA was too busy with other stuff. Is that, is that kind of lower success rate with a regulatory agency, another role that you actively considered?
We did. That was obviously one of the attributes of the landscape that we think has materially changed over the last three years.
Got it. Yeah, no, I agree with that completely. One of the things that MiMedx has historically done is they've pursued regulatory approval in regenerative medicine. Are you gonna have any other efforts to pursue regulatory approval for anything, or is that all put aside?
I wouldn't say all put aside, but, you know, obviously not today. Look, this is expertise and technology that we're building within the company. It may be in our future, but obviously not today.
Got it. Last one for me is on free cash flow. I think we were expecting MiMedx to turn free cash flow positive very soon. Will this change that at all? What, when should we expect the cash from operations to step into positive territory?
So again, when you're talking about our reference to free cash flow, a metric we were using was sort of a P&L-driven metric of adjusted EBITDA less the CapEx and patent costs. We had a very solid adjusted EBITDA result in the first quarter relative to where we've been, so that was turning positive as we saw it in the quarter or at the beginning here in 2023, and this only helps that. The $25 million of savings are cash savings, so it's a very strong impact to free cash flow.
Okay. I think you had said $25 million in cash savings, but $5 million of costs related to this change?
That's right. One time.
Yes. Yes.
Great. All right. Thank you for taking my questions.
Thanks, John.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
Any other questions?
There are no further questions at this time.
Very well.
With that, I would like to turn the floor back over to CEO, Joe Capper, for closing comments.
Thank you. Thanks, everybody, for your questions and for your continued interest in the company. We look forward to speaking to you again in early August to discuss our second quarter results. That concludes today's call.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.