Good morning. My name is Matt Blackman. I cover small and mid-cap med tech here at Stifel. Welcome to the 2024 Stifel Healthcare Conference. It really is my pleasure to host this session with the management of MiMedx . Thrilled to have CEO Joe Capper here with us, and head of IR, Matt Notarianni, who's sitting to my left. They're going to walk us through the story. Joe's going to give us a slight introduction to the story through slides, and then we'll break it down for questions. Obviously, audience participation is encouraged. Joe, thank you for coming. I'll pass the floor to you.
My pleasure, Matt. Appreciate you having us. For those of you who are new to the MiMedx story, we develop and commercialize placental-derived allografts for use in chronic wound healing and a variety of surgical applications. I'll speak a little bit about our markets, our priorities, the reimbursement environment, and then we'll take a pause for questions at the end, so let me, I guess I'm steering the slides here. At MiMedx, we really are committed to the concept of helping people heal from these various chronic wounds and acute wounds that take place as a result of surgery, and this commitment has led us to invest in a lot of clinical and scientific research, which has resulted in numerous publications. It's also caused us to invest a lot in innovation.
We already have a fairly robust portfolio of placental-derived allografts in the marketplace today, and we continue to invest, and you'll see that portfolio growing. You'll also see us diversify into some other types of allografts as well. There's really five things I would like for you to take away from today's discussion. Number one, we are in a large and expanding addressable market. Number two, we are in a maturing market, especially in terms of reimbursement and regulatory framework. Number three, we have a market leadership position. We have a competitive advantage in terms of technology and defensible proprietary intellectual property. And number four, we have an excellent and improving financial profile and balance sheet. And number five, we have an experienced and skillful leadership team, more than capable of executing our plan. So talk a little bit about the size of the market.
The wound market is already quite large, with over 10 million people suffering from chronic wounds. This will continue to grow, driven by demographics and certain lifestyle issues. We find that Medicare beneficiaries are disproportionately affected by chronic wounds, as indicated on this chart, and a lot of the, ultimately, these will lead to amputation if not cared for properly. A majority of amputations can be avoided, and what we find is, once an individual suffers an amputation, the mortality rate goes way down. We're quite pleased to see the awareness of these products starting to increase in the marketplace. You may have seen an article that was published on, I believe, October 10th in the New York Times. We were not mentioned in this article, but we were a major contributor to it.
As the article stated, these placental-derived grafts can reduce pain and inflammation, heal burns, prevent the formation of scar tissue and adhesion around surgical sites, and even restore vision. Again, I went on to talk about the mortality rates for someone that has a diabetic foot ulcer and how it gets that much worse if it leads to amputation. The five-year mortality rate is about the same as all cancers combined. The good news is our products are available in essentially any site where a patient is seeking care. From this chart, you can see we're in the private office, mobile health, nursing homes, et cetera, et cetera, for both acute and chronic wounds. This chart illustrates some of the areas that a product is being used today for surgical applications.
In cranioplasty, we have found that the use of the product will reduce fibrosis and will take a 30-minute procedure down to three minutes, reduction in complications associated with Mohs surgery and also a reduction in leaks in colorectal and bowel anastomosis, so huge benefits derived from incorporating placental-derived tissue into a variety of surgical applications. We also continue to receive excellent feedback from our recent Nature publication. As you may recall, this study found that the use of our human amnion-chorion membranes may function to disrupt the pathological fibrosis or scarring of connective tissue, the real-world implications of which could be immense. Incorporating our proprietary technology into a variety of surgical procedures could dramatically enhance outcomes from improved functionality to superior cosmetic results, and when you couple that finding with the tens of millions of surgeries that take place every year, the opportunity could be staggering.
We also have a lot more studies in flight around Mohs, GI anastomosis, liver transplant, et cetera. Again, most of this is showing reduction in complication. A lot of it is around the ability to reduce scarring and reduce fibrosis. So where are we concentrating our efforts? We really are focused in three primary areas, continue to invest in the development of products that serve our current markets, as well as look to bring in products that may expand our reach. And we talked a little bit about our first product. We've talked a little bit about this in the past, our first venture into the xenograft market with HELIOGEN, which is a bovine-derived collagen particulate. The second area is to develop and deploy programs to expand that surgical footprint.
I just talked about what the potential opportunity could look like given the more than 50 million surgeries that take place in the country every year. So big, big opportunity there. And the last thing we're focused a lot of our efforts on is how do we retain our customers for a longer period of time. This chart shows the breadth of products that we have today, already a pretty extensive product portfolio. We have numerous new products in development. I just mentioned our first foray into the xenograft market, and we're actively looking for synthetics. The placental-derived allograft market is about half of the total skin substitute market. The other half is comprised of xenografts and synthetics. Let me shift gears a little bit and talk about what's taking place in the reimbursement market.
Big news late last week when all of the MACs decided to announce implementation of the proposed LCDs. Why did they do this? If you go back and look at the spend in the private office segment of our market, private office and associated care settings, it has skyrocketed over the last three, four, five years. From about $500 million in 2020 to $4 billion by 2023, the current spend, we're told, is running at about $1 billion per month. The industry is wrought with fraud, waste, and abuse. It's not good for anybody who looks to be a legitimate participant in this space or those of us who have been around for a long time. So we took an active position, quite frankly, lobbying both CMS and Congress and the MACs to drive some of this change.
We were very pleased to see the change take place, or at least the announcement of the change late last week. It is scheduled to be implemented, or they are scheduled to be implemented on February 12th. A couple of modifications from the original proposal. Initially, they had capped the applications at four. That is now at eight. Importantly, we have two products that are included on the approved list for use, and there's about 200 products that will no longer be reimbursed by Medicare in those care settings. And these, as you can imagine, are the products that came into the market and drove the spend to the level it is today, which is not healthy for anybody. This product just shows how well-positioned we are, quite diversified in terms of wound and surgical, and where our products are used in a variety of different care settings.
So that positions us well to compete when these new LCDs are implemented and as the market continues to emerge. We have a strong commercial sales organization, likely second to none in our space, with over 200 direct salespeople. We partner with agents. We have an extensive support network. We have excellent payer coverage. And obviously, we've been in the market for quite some time, and we're developing a market as we speak in Japan. So highlights from the quarter, if you didn't hear them, had a strong quarter of net sales of about $84 million. Our margin stays strong. We continue to generate strong adjusted EBITDA. Our cash balance will likely be close to $100 million. Gross about 80 net when we close out the year. So we're building cash on a quarter-to-quarter basis, and we continue to release new products. I mentioned the strong management team.
The experience comes from all around the med tech space, as you can see from this chart. I started the conversation by saying there's five things I want you to take away from this. They're listed here: large and expanding addressable market, maturing reimbursement landscape, which we just talked about, competitive advantage in terms of technology and defensible IP, strong financial position and balance sheet, and then an experienced team. If you agree with me on these five attributes, you can only conclude that this is a very attractive asset at this point in its evolution. Matt, questions?
Sure. Thank you for that. It was a great overview. I'll remind anybody in the audience, it's meant to be an interactive session, so feel free to raise your hand or throw something at me if you'd like to ask something. Joe, I don't know if you want to stand up there or sit down, whatever's most comfortable for you.
That's good.
Okay. Maybe sort of dive into some of the nitty-gritty here. Maybe take a step back, and I think you touched on it to some extent in the presentation, but what are you trying to build? What is your vision here for MiMedx? Obviously, you spent a lot of time the last year plus sort of cleaning things up while still pushing forward initiatives, but what do you see this company being three, four, five years from now?
Yeah, good question. I think for that timeframe that you're talking about, we'll stay close to home in terms of commercializing tissue-based products in wound and surgical recovery. If you look at the size of the surgical market, we don't have to go that far afield to have a lot of nice growth for the coming years. If you think about it in terms of dollars, we believe that the market should, we should be able to grow our business in kind of the low double-digit growth rate with adjusted EBITDA margins above 20%, and we should be able to accrete more margin as the business scales, so decent growth rate, and look, you can accelerate that growth rate if you leverage your balance sheet, as you know, and we plan to do that at the appropriate times.
If we can have an organic growth rate that's 2x the market growth rate, we can augment that with some inorganic activity. We can have EBITDA margins in the 20s and getting better with scale. Once you're in the $500 million revenue range, there's not that many companies that fit that profile. So from a financial perspective, I think we're well-positioned to continue to build value in the asset. And just from a product standpoint and a service standpoint, there's so much we can do just in the areas that we're in today.
And to get after this double-digit top line, this 80-plus% gross margin, frankly, these are areas you're already roughly at. You don't need to do anything inorganically. This is sort of the business as it sits today. You think you can sustain this over the next several years? Or does it involve - and whether it's big or even just small tuck-in product-type acquisitions? How do you get to this formula?
Yeah. I mean, look, I do think we have excellent growth drivers in place today in the company and the market that will allow us to have decent growth. If we want to accelerate the plan, that's when we would look to license or acquire small or even medium-sized assets, and really, if it doesn't fit the strategic plan, we won't look at it. If it does, we'll take a look at it, and it has to meet certain other criteria, but we've only done one small kind of little acquisition at this point, but we have looked at numerous other ones. Some just don't fit our profile.
Yeah. Maybe let's move on and talk about what happened last week. Obviously, a very positive outcome, a lot of heavy lifting and work on your part, the company's part. On the reimbursement side, you mentioned the LCDs. Maybe if you could, you touched on it briefly, but just sort of take a step back and just frame everything that's sort of happened in this market, why it's been perhaps a competitive disadvantage. And I guess most importantly from here, how you're able to capitalize on a market that will obviously be focused more on product-specific attributes and such rather than just the financial aspect of making money.
Yeah. So what we're really talking about is Medicare reimbursement in the private office and associated care settings where the products are reimbursed using the Medicare ASP methodology. So for us, it's about 25% of our revenue. That's where our exposure lies. And why did we get to this place? First of all, placental-derived allografts are too easy to bring to market from a regulatory pathway perspective. We have been actively advocating with the FDA and frankly, congressional staffers as well to upregulate that to something more akin to a device or like a 510(k). We think that's more appropriate for these products. If you look at the way xenografts and synthetics are approved, they need a 510(k) pre-market clearance. With placental-derived allografts, it falls under Section 361, which is essentially self-certification. So you have this incredibly low barrier to entry on the front end.
As I mentioned, they're reimbursed using the CMS ASP methodology, which allows you to enter the market and set your own price. Low barrier to entry, Medicare assigns Q codes to these products far too easily without a requirement for any clinical data on the front end, and then you get to set your own price. What could possibly have gone wrong? We're living through it, right? It attracted some really bad actors who came into the marketplace and just started to drop product after product in the market, which are essentially very similar products. Again, no clinical evidence to prove efficacy, but they just proliferated the market with these products. Hence, you saw the runaway spending. Medicare and the government started looking at it more closely a few years ago, but the government moves relatively slow. It took some time.
I commend the MACs, who ultimately took this under their own authority to implement these LCDs. And what the LCDs have basically done is put in place the requirement for clinical evidence on the front end and eliminated reimbursement for those products that don't have them. And it's got to be fairly well-powered clinical evidence in the form of a randomized controlled trial. That's the litmus test right now. And whether that changes or modifies over time, we'll see. But it has really limited the number of products that can be covered down to about 17 in this category now. So that means about 200 products will no longer be reimbursed. And as you can imagine, as I mentioned during the talk, that these are products that are very high-priced. Great for us because our products do have a lot of clinical and scientific evidence that stand behind them.
So when we are selling on efficacy and safety, typically we have an advantage. We're going to win in those conversations. And that's really where any medical product should be sold. These should be no exception. When you're selling on price, it's never a good thing.
And how much of the. Oh, please, Colin, go ahead.
You talked about how the clinical bar was raised to get on this type of list, lowering the number of products that are really reimbursed from 217. For those competitors of yours that are willing to spend on generating that data through RCTs, what can be done as far as preventing them from setting their own price once they get back on the list if they're willing to?
That is an excellent question. So this was really step one, and I see it as a bridge cure. They absolutely—they being CMS absolutely have to address the pricing side of the equation. The right answer, in my opinion, take it completely off of the ASP methodology and price it like it's a device or supply, which means you're going to get a fixed price for the category. That's the right thing to do. That's what we have advocated for. The normal mechanism by which CMS will make changes like that is in the construct of the Physician Fee Schedule, which is reset on an annual basis. So if that's the framework they use to address this, the earliest we would see something was probably July of 2025 for implementation in January of 2026.
Now, they may be able to take action outside of that framework, so it might happen sooner. But you're absolutely right, that has to happen. Because look, they're making billions of dollars, right? Why wouldn't you invest $3 to $4 million on an RCT and get your product back? Price it at $3,000. Order of magnitude, these products were priced at 20 times what they were five years ago. Good question.
Any more, Colin? No?
Yes, sir.
Could I ask just that there was language in the recent proposal about the number of sheets you can use in a procedure, and that's been one of the worries on this space. So can you just comment on the, I think it was four up to eight?
That's right. Yeah.
Just comment on what you saw in there.
There was a couple of proposed elements that were troubling to the clinical community. And as you indicated in the initial proposal, they were setting a cap at four applications. A lot of chronic wounds require more than four applications to get closure. So they took it from four to eight. Now, in fairness, you could always go beyond the four, but you just need to document the medical necessity to get there. And that kind of had a lot of participants in the industry a little bit nervous because what does that look like? Is it going to be used as like a prior auth, or is it going to be used for audit purposes? There wasn't a whole lot of clarity about that. But taking it from four to eight gives the clinical environment a lot more breathing room to care for that patient.
Could you maybe talk about so going from 200 products down to 17. I can do the math. That's a lot of products going away. What is the opportunity from a and whether it's a share or a volume standpoint. What's the opportunity for MiMedx to take advantage of now?
Yeah. I'm going to shy away from putting a figure on it, even though I know you would love me to. It's a big opportunity, to be frank. You said it going from 200 down to 17, and we have two of the 17. So I think, though, in the near term, you can expect a little disruption. Why? Some of these products will go away. Some of these patients will shift from one care setting to another to get proper care. And then, of course, you're going to. Doctors are going to stop using one product and start using another product. So all that takes a little bit of time and can be disruptive. But for companies like us who have a commitment to developing products based on explicit clinical needs and then back those products up with robust studies, we're in a good position, right?
So we have a competitive advantage, not just from the standpoint of having two of the 17, but as we move forward. This company has a commitment to developing products based around market needs and then backing those products up with the science.
And so maybe just what's next from here in terms of the reimbursement landscape? You've mentioned, obviously, there are several things that still need to be tackled. Is there anything in 2025, 2026 that we should be sensitive to as this hopefully draws to a conclusion? Just want to make sure we have our eyes on the ball.
Yeah, I think it's pretty clear. I think these will likely go into effect. What you can expect is people who were not on the list to continue to look for ways to get on the list. What's the clarity around the timeframe, the process for reconsideration, so I think there'll probably be more about that come out, but I don't think it really changes significantly or materially the outcome. I think you'll see these LCDs implemented, and you'll see the market shift, and then we'll see what happens after that. As I indicated earlier, I do think that my strong desire is that CMS address the pricing side of the equation as well so we get away from this for good.
And there's no prescribed timeline on that. It's just, does it have to go through another full review process?
Yeah. And they have an annual framework for dealing with changes in pricing. Typically, it happens within the framework of the Physician Fee Schedule. So I do think that will happen. If I'm making a prediction, I think they're going to make a change on the pricing side as well.
And then on the reimbursement, sorry, on the regulatory side, what's the sort of timeline there or the process there to clarify what's needed and what's not?
Yeah, I see less clarity there. The FDA has made public statements around the fact that they believe these products need to be upregulated. And going from Section 361 all the way to a BLA is not the right answer. And I think everybody agrees with that. So at least based on public statements, the agency has been looking for a pathway that would upregulate but not put that type of burden on developers who want to bring these products to market. I personally think it makes more sense to move it over into the device category, but there's issues that may prevent that from happening. The good news is the FDA has already approved one placental-derived particulate as a 510(k). So whether this was well-planned as part of a long-term plan or just happenstance, I don't know.
But as you can imagine, ourselves and other competitors in the space are now running products through the 510(k) process. So we'll see where that takes us. That's the right answer. It's a well-established pre-market clearance pathway, and it's working for xenografts. It's working for synthetics, and now already one placental-derived allograft. So we'll see.
And maybe, again, I've been telling people it's the end of the year. I tend to get very reflective, a time of reflection, but also a time of looking ahead. You obviously accomplished a lot in these last several months and the last weeks, especially. When you think about 2025, where are you going to be spending most of your time? Back to sort of, again, the execution part of the story, push the advocacy stuff to the side. I just want to understand where you're going to be spending most of your time for the next 12 months.
Yeah, it's a good question. A disproportionate amount of my time has been spent dealing with these issues, as you can imagine, over the summer, which I will refer to as value-creating but non-revenue-generating activities, right? So I'd rather be spending my time on the front end of the business and kind of developing, refining, and executing the strategy of the business. Fortunately, I have an excellent team in place who kind of spearheaded a lot of the conversations with CMS, the MACs, and congressional staffers. Our GC, Butch Hulse, is probably the best in the space. So he drove a lot of that. But it does kind of consume your mind share when you're going through a process like that. So I would say more on the front end, more on growth, more on strategy execution, and we'll see.
And so that would include, I would think, sort of you've commented on it several times over the last several months, but focus on that surgical business, maybe.
That'll do.
Yeah. Okay.
Yeah. Surgical is where, I mean, again, I talked about it. The size of that opportunity could be immense. Look, a lot of these, when you saw the different applications of use already today, most of that happens organically within the marketplace, and then we react by trying to build evidence behind it so that we can market that on a broader spectrum, and again, somewhat limited on what you can say and do because of the regulatory pathway, but so all this kind of weaves together, cleaning up reimbursement, a better regulatory pathway, and more science, more research behind the application of these products. I think you'll see a greater, more use cases, a proliferation of the use of these products in the surgical environment, but that takes a lot of time and effort, and we need investment in not just the research side.
We're going to need more investment in the commercial resources to reach these markets as well, but it's pretty exciting when you look at the size of that opportunity.
Yeah. I think we'll leave it there unless there are any final questions from the audience. You're good, Colin? You sure? Okay. All right. Well, Joe, I really appreciate your time here. Thank you so much, Matt. You as well.
Thanks, Matt.
And thank you all for attending. Good to see you. And that's a wrap.
Thanks, everybody. Appreciate it.
Thank you.