All right, let's go ahead and get started. My name is Ross Osborne. I'm the med tech life science tools and diagnostics analyst at Cantor Fitzgerald, and today we are joined by MiMedx's CEO, Joseph Capper, and head of investor relations, Matt Notarianni. With that being said, Joe, would you provide a brief background on yourself, and MiMedx?
Yeah, appreciate it, Ross. First, I'll start with MiMedx. As most of you know, MiMedx is a plus, we commercialize a line of placenta-derived allografts that are used in chronic wound care and a variety of surgical applications. I've been with the company for little over a year and a half now. My background has always been med device, med tech, and some med service. This is the fourth company that I've been the CEO of, one private and three public. So one of these days I'm gonna get it right. But it's a really interesting company.
The technology is just fascinating, and that really, that's what drove me to the space. As mentioned, I had never been in this category in the past, so when I started to do a little work on the tech and the company itself, I was just fascinated by what it can do and the benefits that are derived by individuals that are suffering from some of these chronic and acute wounds that I mentioned.
Great. Going off of that, would you walk through the chronic, and acute wound space and where your products fit in?
Yeah. So where our team commercializes today is really in kinda inpatient/outpatient wound care, big presence in the hospital, as well as the private office and some of the adjacent care settings around the private office, and each one of these pays slightly differently, as you may know. And we have success kind of in all three care settings. More recently, we've put additional effort in the hospital, specifically around OR and surgery.
Great. And then, another key factor in the space, which is a hot topic of late, has been reimbursement. Would you walk through your thoughts around the proposed LCD and other factors, affecting the space in general?
Yeah, so really what we're talking about is disruption around reimbursement in the private office and other associated care settings. That's about a third of our total revenue, and we're really only talking about Medicare fee-for-service, which is about... When you look at it that way, it's maybe 20%-25% of our personal our company's total revenue that has exposure here. So what's gone wrong? First of all, the products we're talking about are regulated under Section 361 by the FDA. What does that mean? That means there's really no prior or pre-market clearance to bring a product to market, so no clinical trials, no research. You certify that this product fits under this Section 361.
You apply for a Q code, and you get your product in the marketplace, so really easy to bring the product to market, super easy to get a Q code. Medicare's handing them out like candy, and the products are reimbursed using the CMS ASP methodology, which means what? It means you get to set your own price. So no real barrier to entry. You set your own price. What could possibly go wrong, right, and so what's happened is people have figured this out, and we've attracted a handful of unscrupulous competitors who are now driving that ASP up and up and up. Put it in perspective for you. In 2020, the total spend in that Medicare private office setting was less than $500 million. By 2022, it was about $1.5 billion.
Between 2022 and 2023, one year, it went from $1.5 billion to $4 billion, or up $2.5 billion, right? So that's not being driven by market demand. It's being driven by price manipulation. So what's happened is, these folks have come in, and they've designed these schemes specifically to overbill Medicare. Medicare is trying to respond to it. The right way to respond to it is through the pricing mechanism. They should change the whole. They should move it out of ASP, they should treat them like supplies or devices, and that should be done through the Physician Fee Schedule. That has not happened to date, and there's a couple different things they could do. They could cap pricing through that mechanism. They could bundle it, et cetera, et cetera.
What they have at their disposal right now are the Medicare administrative carriers, which you mentioned, who all have proposed these local coverage determinations, and they did it in unison, so it looks like a national coverage determination. This is not the way I would've addressed the problem. This is. It's not the right venue for it, but I understand what they're trying to do because they've got this runaway spend. The LCDs have been proposed, and they have not been implemented, and there's disputes on one or arguments on both sides, I should say, as to whether or not they should be or shouldn't be or they should be modified. I am not gonna bet if they're going to be implemented in their current or a near, similar format, or when that's gonna happen, but something will happen.
I've spent a lot of time on this subject. I have met with a lot of stakeholders in the industry. I was just on the Hill two days ago, meeting with a handful of legislators. This has got congressional attention. I've met with CMS three or four times. It's got the attention all the way up to the upper echelons of CMS, so it will be addressed at some point, and it will be much, much better for our industry, right? This is a part of the industry that needs to be cleaned up. It will be a more investable space once that is settled.
Maybe just to kind of bundle that topic with one of your prior questions. I mean, there is a tremendous unmet need in the chronic and hard-to-heal wound space, right? If you think about it, and certainly some of the data, you know, bears this out. There are anywhere between 10 million sort of chronic, hard-to-heal wounds out there in the U.S. You know, it used to be kind of one in ten. You know, it's been ramping up. Maybe one in five Medicare beneficiaries ends up having to deal with one of these wounds. So it's definitely an issue that patient population, you know, has at some point, you know, over the course of the time that they are a Medicare beneficiary.
What does that mean as it relates to, you know, reform and what that could look like in terms of changing the payment structure, maybe changing the ways in which these patients receive care? It doesn't change the fact that a lot of those wounds need care. You know, our position has been we've got a lot of some of the oldest products with the most established science and efficacy out in the market. You know, that should win. It should win no matter what area of med tech you're playing in, and so we've really tried to lean in with the scientific evidence that we've generated, you know, in support of getting commercial payer coverage.
Then further that, you know, in terms of looking beyond the Medicare population in surgical settings, where, you know, a lot of these products could support, you know, similar, you know, good outcomes for clean closure of acute wounds. So anyways, just to kinda put a bow on it, it's a big issue that CMS has to. Not just in dollars, but in terms of the population they're trying to fix for.
I do think one of the things to wrestle with ensuring patient access while they clean this pricing problem up. This is a serious issue. People who have chronic wounds that are not cared for properly, ultimately, lower extremity wounds will lead to amputation. And if you ever look at the five-year mortality rate for an individual with a lower extremity amputation, it's about the same as all cancers. It's. People don't realize that. This is a serious chronic condition.
Absolutely. And then, Matt, you know, you chat with investors every single day. You know, where are they confused around the reimbursement? What are you guys trying to explain to them?
Yeah, I don't know if it's confusion or uncertainty or some combination of both, right? If you go back, as Joe was talking about, during kinda whatever you wanna call the normal period, 2019 or so, there was a finite number of products that were in the market and kind of a handful of established players in the space offering, you know, 361 products or maybe five, 510(k) cleared xenografts or synthetics. It's exploded, right? In being able to find this loophole, essentially, in the private office, you've seen that segment of the market and those adjacent care settings really explode, both in terms of dollars and sort of the volume utilization. Medicare for years, for...
I mean, I've been at the company for two years, and it's - it was going on just before I joined, has been wrestling with this issue and has floated different ideas around how to fix it, but nothing concrete. You know, there's been, we've seen pockets of enforcement, we've seen, you know, different sort of bulletins from OIG, et cetera, but nothing that, that's fundamentally changed the structure there. That typically, that setting is ripe for, you know, sort of volume growth, et cetera, because that typically is where the front line, you know, the patients present. They, you know, as they move through the course of their treatment, they might end up in other wound care settings or hospital settings.
The patient's there, the docs are there, and this loophole has kind of evolved and kind of taken different shapes, to you know benefit these companies for Medicare billing purposes over the last couple of years. So really, I think what investors are trying to wrestle with is, okay, we understand there's a problem, and it's clear as day when you start looking at the annual spend, the Medicare data, the number of Q codes in this category, you know you can track that each quarter. You know how many are being issued, what the ASPs look like, how they're you know evolving quarter versus quarter. So there's broad recognition that there's an issue. It's really a question of when and how that gets cleaned up.
You know, our position, again, with our products is the best product at the lowest price really should win. That's kinda table stakes for kinda any area of med tech, you would think, and that's not happening. You know, we feel like our products are certainly best in breed. They perform extremely well in other care settings where there is a I guess, smaller competitive set with different barriers to getting in and getting broad utilization. So what do I mean by that? Value analysis committees, right? Commercial payer coverage.
Those are different bars. Those bars really don't exist in the area where those loopholes are. So we're confident, I think, that on the other side of reform, where it's more of a jump ball situation, where, you know, you put our product against any others, we'll take that all day, any day. It's just a matter of kind of the when, we get there.
Yeah, I think the message to investors is, this will stop. This will get cleaned up. Again, I have spoken to all the stakeholders in this category that are dealing with this challenge. I don't know if it's next month or two months from now or three months from now, but it will end, right? It will get back to some normalized rate, and products that are being priced at 10, 20, and 15x the historic rates, they're going to go away, and this behavior is going to get cleaned up, and enforcement has already begun. So it'll get cleaned up.
Great. Switching gears, let's talk about M&A. So earlier this year, you had a little deal with HELIOGEN. Maybe touch on that first, and then would love to hear your thoughts about the market broadly.
Yeah, so, our strategy as we set out at the beginning of the year really is revolving around three areas. One is to continue to develop and diversify our product portfolio, both within human-derived placental tissue, as well as expanding that into the xenograft and synthetic categories. So the second priority was really to go heavier into the surgical market, which is those two are not mutually exclusive. And then third, to get a lot closer to our customers, so we have a whole customer intimacy initiative underway. The acquisition of HELIOGEN was, and now that we're in limited market release of the product, it's really our first foray into non-human tissue. Xenograft, it's as a reminder, it's a bovine-derived collagen particulate that's used for complex wound healing, and we're really excited about it.
Early feedback is that it's gonna be widely accepted, and we'll continue to look for those opportunities. That was a relatively small investment on our part. So the way we look at investments or M&A per se is really can it accelerate a longer-term strategic plan, and then do these assets fit in our company culturally? First step last year was really to clean up the financial profile of the company. We brought the company from pretty much break even to a fairly profitable organization, cleaned up the balance sheet. We had a large preferred equity position that converted to common.
We had some pretty expensive debt that we've been able to refinance, and now we're throwing off a fair amount of cash and building our cash balance every month, every quarter, which is exciting. So, we have the resources to do more things. It's, you know, what, where are we gonna spend that money, and does it accelerate that strategic plan? That's really the way we look at it.
Maybe just to add on that, I mean, if you think about us two years ago, we were the human birth tissue company, right? The entire offering was derived from the source material that we get from donors around the country. But that occupies, you know, a limited amount of shelf space in these care settings, where they're reaching in and grabbing some human-derived products, some synthetically made products, and some xenograft products. The other notable thing about HELIOGEN, you know, it's our first 510(k) cleared product because as you know, xenografts and synthetics are treated in a more normalized sort of FDA regulatory environment with the 510(k)s.
And so, you know, I think of those three verticals as sort of platforms and you know, would be great to be able to build that out. Now, broader M&A, there's a handful of other areas. You know, could make us more of a wound care company, right? And extend kinda our presence along that continuum of care. I think more interestingly, as we move into surgical, surgical's about a third of our business today, you know, and is growing. There's a fair bit of white space in terms of the use of our tissues in a variety of procedures. You know, are there acquisitions or opportunities, so to speak, that could accelerate our path, you know, and presence there.
Going off of that, would you walk through some of your clinical data, past and ongoing?
Yeah. So, in the surgical setting, we need to really do three things. One is continue to invest in research. We hear that every day, that if we're gonna commercialize products in that environment, physicians they're going to wanna see the data, they're gonna wanna see research. And secondary is expanding the product portfolio to become a partner that brings more solutions. Again, that was the rationale behind HELIOGEN. And then third, we really need to invest in more commercial resources as appropriate. Research is a big investment area for us, and it's important. I think, the recent publication of the Nature article is an excellent example of high-quality research.
I think the esteem of the publication itself speaks to the importance of the work, and what that found was that our human amnion chorion membranes may serve to disrupt the fibrosis and/or the scarring of connective tissue, which the practical implications of that are really immense. If you think about the fact that there are nearly 50 million surgeries just in the U.S. on an annual basis, and simply by incorporating MiMedx's proprietary technology into those surgical procedures, you're gonna reduce scarring. It's gonna lead to better outcomes, from improved functionality to superior cosmetic results. This is really important, right? And so we view that as our largest market opportunity.
We can't put a number on it because, again, this is a kind of a growing space right now, and we're already starting to see the products being used in a variety of additional surgical applications, from Mohs and dermatology, craniectomies, a variety of of bowel anastomosis. There's C-section closure. We can go on and on. There's a several applications where surgical procedures, where these products are being used. So, pretty exciting, and suffices to say that we are investing in a lot of research.
Maybe just to add to that, the EpiFix, you know, randomized controlled trial. On the wound side, right? Again, a little bit different dynamic here versus what you might see in other areas of med tech, right? Where products are launched before the publication of, say, an RCT. You know, and that has up until now really been the norm. That's been part of our launch plan, right? So we've got that trial underway, but you know, really, I think we stand on a really solid body of scientific evidence with the entire portfolio. Obviously, there's work to do to build out the surgical portfolio data set, you know, for specific indications or procedures. You know, that's not gonna change for us. What does that mean in terms of dollars?
I mean, it's- I would say it's not huge relative to, you know, the rest of our operating expense lines. It's really about kind of flexing that muscle for us and for that industry, being able to find the right patients, you know, to participate in those trials. We're fully confident that what we see in the real-world setting, certainly with EpiFix, for example, will really shine in the trials.
Great. And then maybe just thoughts around international expansion opportunities.
Relatively small for us right now. We've talked a bit about our opportunity in Japan. We've done a lot of work to prep that market, and now we're beginning to commercialize product. We're seeing growth month over month, quarter over quarter. We have all the key opinion leaders using the product. They're reordering the product. There's reimbursement for the product. People are getting paid, which is really important. So we're starting to see the product really get a footing in Japan, which is exciting, and we've talked about that market being fairly sizable over time. First human tissue in the Japanese market, so this will take some time.
We're in other smaller markets in the Middle East, Taiwan, Australia, et cetera, but it's just not a big market for us. We think as we build out the product portfolio to add xenografts and synthetics, there will be more opportunity. Some of the markets are somewhat closed to human-derived tissue, but relatively small, so we don't really break it out and talk about it yet, but we think over time it could be a sizable opportunity.
Got it. And then a less fun topic. There's been some recent headlines around some litigation issues with former employees and one competitor. Could you walk us through this and, you know, share any insight you're able to?
Yeah. I mean, ultimately, these disputes will be settled in the courts, but I appreciate you asking me about it, simply because there's been so much misinformation and factually incorrect statements being made about the company. So if you think back to our last earnings call, I mentioned that we had experienced above average employee and customer turnover, which in part caused us to amend our guidance for the full year, right? So this was really around a couple regional areas of the country where one of our competitors, with former MiMedx executives, conspired and executed a raid, if you will, of our sales organization, and they lured away a handful of participants and induced them, frankly, to violate their contractual commitments to MiMedx.
In order to protect ourselves against this anti-competitive behavior, we filed suits against the company, the executives, as well as the individuals, right? All of these folks have contractual commitments not to compete, and they have other commitments, like non-solicitation and protection of proprietary information, which we believe that they are violating. So, again, it'll be settled in the courts. I do think it's interesting, though, that in their responses, they took some... They made some wild accusations about the company, and claims about the company. None of them said that they were not in violation or in breach of their contractual commitments.
They just said, "Oh, gee, because the company did all this stuff in the past, we shouldn't be held to them." And some of them are pretty kind of interesting commentary. One that I found quite ironic is that because the company had these misdeeds in the past, we didn't feel comfortable working there. They're going to work for a company that's being run by executives who were here during the time of those misdeeds and were implicated in that activity. So it's really amounts to a whole lot of baloney, and I get it. You know, you did something bad, and you're gonna throw something against the wall and see what sticks. It's unusual that their counsel has elected to press release their responses to these claims, but not inconsistent with the behavior today, right?
Their plan was to try to damage the company, and I think in, you know, working with their counsel, they're taking steps to try to do that, right? So they figure the more they put out there, the better. So they make claims like... They mention our issue with the FDA with regard to AXIOFILL. As we've told people in the past, that we're working with the agency, also in conjunction with outside regulatory counsel, and we're very comfortable that we're allowed to continue to market that product while we work through a resolution with the FDA. There's no safety concerns with the product, there's no quality concerns with the product, and the FDA never asked us to pull it from the market. Had any of those things occurred, we obviously would've pulled it from the market.
In fact, the last communication from the FDA was, "We're taking no further action, pending the resolution of the current dispute," which we'll get through. It's not, I mean, it's not a major issue, but again, reinforce the fact that zero safety and quality issues. But that, again, is just more noise. And then there's other allegations that we were improperly marketing our products, we priced them, et cetera, et cetera. As you know, one of the reasons we're not as competitive in a private office is because we don't have high ASP products, right? So that, that was a little bit confusing to us as well. We do have certain questions about some of the companies, including the one they're working for, the way they price their products and some of the selling tactics that they employ in the marketplace.
We think they clearly crossed the line, so we'll get through it, you know. Another comment was, well, we discount products. Everybody discounts products, so there's or volume-based discount products. You know, again, as I mentioned at the outset, we'll adjudicate it through the courts. We're very comfortable with our position. It's unfortunate. You don't make these decisions lightly. It's not where you really wanna spend company resources, but you do have to protect the company's assets.
Absolutely.
Maybe just the last bit. I mean, the remaining points that were raised that Joe didn't really touch on. I mean, to his point, they're not germane to the business today, right? I mean, this company's gone through a couple different transformations, right? To obviously clean up the acts of the past, if you will, and also focus the business, right? So, you know, I think we're very comfortable with the product portfolio and the strategy that's driving it, you know, moving forward.
Great. To end on a positive note-
Mm-hmm.
How do you see your free cash flow evolving over time?
I think it'll continue to build. We're not putting a - I'm not gonna put a number out there, but it's... We're very pleased with how the business is operating. We get more and more efficient over time. As the organization has scaled, we're getting more efficient. It's in the DNA of the business now, I believe, and it will continue to become embedded in the way we operate. We'll look to deploy some of that cash, as we talked about in the past, to accelerate the strategic plan through M&A and through research, et cetera, et cetera. I think you'll be excited to see some of the research that'll come out in the near future, some of the additional products that we have in development internally, and some of the work we're doing from a corp dev perspective as well.
It really is an exciting business. It's a shame that we're dealing with some of these external issues like regulatory pathways and reimbursement in the private office setting, and then this noise we just talked about, which is really all kind of associated with the same thing. These folks wouldn't be around if it wasn't such a loose marketplace. So, that'll go away. We'll put that in the rearview mirror at some point, and MiMedx will be one of the most competitive companies in this category, and this category I'll describe as chronic wound and surgical recovery. This is a fascinating technology, and the benefits that are being derived from patients that have these chronic and acute wounds is unbelievable. So it's an exciting place.
Absolutely. Well, I think that's a great..