MiMedx Group, Inc

Ladies and gentlemen, thank you for standing by. And welcome to the memetics first quarter of 2022 operating and financial results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to your speaker. Mr. Chad Comer, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. Welcome to the MiMedx First Quarter 2022 Operating and Financial Results Conference Call. With me on today's call are Chief Executive Officer Tim Wright, Chief Financial Officer Pete Carlson, President Wound Care and Surgical Dr. Rohit Keshav, and President Regenerative Medicine and Biologics Innovation Dr. Robert Stein. Tim and Pete will provide a summary of our operating and financial results for the quarter, and at the conclusion of their remarks, Tim, Pete, and Drs. Keshav and Stein will be available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements, including potential timelines for our ongoing clinical trials and FDA submissions and approvals, and expected market size for these products. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual timing and FDA approval will depend on a number of factors, including the results of our clinical trials, our interpretation of those results, the impact of COVID-19, actions by others that affect our timelines, and other factors that the FDA deems important. Additional factors that could impact outcomes and our results include those described in the risk factor section of our annual report on Form 10-K and our quarterly reports on Form 10-Q. Also, our comments today include non-GAAP financial measures, as we provide a reconciliation to GAAP in our press release, which is available on our website at www.memetics.com. With that, I'm now pleased to turn the call over to Tim Wright.

Tim? Thank you, Jack, and good morning, everyone. On today's call, I will highlight some of the key drivers behind our consistent top line growth and provide an update on significant initiatives we have underway to streamline operations, expand our reach, and enhance shareholder value. Yesterday afternoon, we reported the third straight quarter of double digit top line growth in our continuing portfolio of tissue and cord products. First quarter net sales of this portfolio grew 13% year over year. We are executing on the fundamentals of our growth strategy and driving strong performance. Last year, we completely reorganized the sales and marketing teams, taking a major step in improving our ability to execute commercially. We focused on geographic Salesforce optimization and enhanced educational resources to assist our sales force. Additionally, we align the compensation plan to reward revenue growth. I believe we have the most highly trained memetic sales professionals and agency sales colleagues to communicate the clinical and economic value of our market-leading products. In short, the changes we have made to date are working. We are gaining traction in the under-penetrated surgical recovery market by expanding our reach in procedures where our customers are looking for new clinical solutions to address complex cases and where patients are seeking a better outcome. Our commercial research and product development teams are collaborating and executing, allowing us to make significant progress toward our targeted objectives. The initiatives we implemented over the past year are coming to fruition as we continue to execute toward our objective of sustainable double-digit growth. Following the end of enforcement discretion, we faced a 13% shortfall as our Section 351 products came off the market. With this quarter's strong top-line performance in our continuing portfolio, we have essentially closed that gap. A major expected near-term contributor is the launch of EpiFix in Japan following the approval of reimbursement for this product. As a reminder, EpiFix received regulatory approval to be marketed in Japan last June. And since then, we have been in constant dialogue with the Ministry of Health regarding reimbursement and timelines. The reimbursement review process typically takes 9 to 12 months to complete following regulatory approval. Though COVID has slowed down this process for many companies seeking reimbursement decisions in Japan, we will remain vigilant in our efforts to gain full reimbursement approval. In the meantime, we are focused on our launch readiness plans. We have gained the support of local key opinion leaders and prominent medical societies. And I would like to take a moment to acknowledge our marketing, operations, clinical and regulatory teams, all of whom have been instrumental to our progress to date. Thanks to their efforts, we have identified clinical sites for the initial product evaluations and have selected our local distributor as a key part of our go-to market strategy. This distributor will help supplement our direct resources on the ground in Japan, and we are well on our way to putting in place the necessary supporting infrastructure. We remain confident in our ability to secure reimbursement and we stand ready to officially launch the product shortly thereafter. Japan is a very attractive market for us. EpiFix will be the first and only amniotic product approved use, giving memetics a first mover advantage. Our regulatory and clinical operations groups negotiated the labeling for EpiFix in Japan to include coverage for all hard to heal wounds. which is considerably broader than our coverage here in the U.S. We estimate that the total addressable market in Japan is just over 600,000 patients, and we anticipate we can access approximately 100,000 of those patients with our product. Turning now to the planned launch of our two new products in the U.S., AmnioEffect and our Placental Collagen Matrix product, or PCM. We are bullish about these innovative product introductions, both of which we expect to launch in the back half of this year. First, AmnioFix. This is a membrane product similar to EpiFix and AmnioFix, but is thicker and can hold a suture. At launch, our direct and agency sales teams will target surgical procedures where a surgeon needs to anchor or suture the graft, such as in a rotator cuff repair or a complex wound reconstruction. Customers with experience using our amnio cord portfolio have been asking for a larger size offering, and we believe amnio effect can address that market need. We are on track for a limited market release next month and have more than 20 unique sites identified for the first clinical evaluations. Our second product introduction, PCM, is made from the placental disc. and will be available in a particular format for use primarily in complex wounds that are deep tunneling or difficult to reach with conventional products. Advisory panels that evaluated PCM provided positive feedback and shared excitement about its features and benefits. We know the target market for this product and our sales representatives and medical liaisons will be ready to engage those customers when the product is ready to launch. Transitioning to our novel late-stage drug biologics pipeline, we view our micronized DHACM injectable platform as an outstanding opportunity, and we are taking meaningful steps to accelerate the start of trial enrollment in our planned NEOA clinical trial program. Our clinical operations team, under the leadership of Dr. Bob Stein, is preparing for the initiation of our next studies in knee osteoarthritis. And consistent with the industry best practices we're lining up industry leading clinical and scientific resources to augment our own efforts, along with world class experts in the field of osteoarthritis. We have been big rigorously assessing third party collaborators who can help oversee clinical trial site monitoring data management statistical analysis and reporting activities and I look forward. to updating you on our progress in the very near future. Furthermore, I'm excited to share that we are well on our way towards the formation of an exceptional scientific advisory board charged with providing both external expert and clinical perspectives and high-level counsel on the company's micronized de-hackam injectable pipeline and EOA, as well as other indications in musculoskeletal disease and in sports medicine. These individuals share our enthusiasm about memetics' micronized DHACM placental biologic injectable and are eager to be engaged with us to help drive our registrational studies forward. In addition, I've asked our R&D teams to accelerate our publication strategy. It is imperative we fast track these research initiatives to build on the data derived from our Phase IIb KOA study and further educate the market on the potential impact of micronized DHACM on the underlying disease process. If approved, we see blockbuster revenue generation potential in these programs and we are working to accelerate our path to serving these patients suffering from a gaping void in safe and effective treatment options for patients suffering from knee osteoarthritis and other diseases where our underlying mechanism of action can be clinically beneficial. Now, turning to strategic initiatives, in April, we created two defined cohesive internal business units within the company. The first is focused on wound care and surgical recovery markets, our existing product portfolio, and near-term innovation. This team is charged with growing our existing business, and an important part of that is the development and launch of two new products each year. we are focused on significantly improving our overall product vitality index. The second business unit is focused on regenerative medicine technologies, specifically progressing our placental biologics platform towards registration as an FDA-approved biological drug in the treatment for knee osteoarthritis. This organizational structure allows for each business unit to focus on areas where they can create the most value for our patients and our shareholders. The senior leadership team we have assembled at Memetics is talented, experienced, and well-equipped to accomplish these strategic initiatives that we have outlined. And I'm confident that this realignment best positions our collective abilities to innovate, execute, and achieve the next phase of growth and R&D milestone achievements for Memetics. These are exciting times for your company. The commercial business is consistently performing and growing at double-digit rates. Moreover, it provides the funds necessary to drive innovation in our research programs. Now I'd like to turn the call over to Pete for a review of our first quarter results. Pete?

Thank you, Tim, and good morning, everyone. Before I begin, unless otherwise specified, all result comparisons referenced in my prepared remarks are on a year-over-year basis. We had strong revenue growth in the first quarter, outperforming our own expectations. We recorded net sales of $58.9 million, down 1.8% from $60 million. This slight decrease reflects the loss of sales from our micronized and particulate products in the U.S., offset by the strong growth in our continuing portfolio. As Tim mentioned, following the end of the FDA's period of enforcement discretion on May 31, 2021, we faced a 13% shortfall as our Section 351 products came off the market in the U.S. With this quarter's strong top-line performance in our continuing portfolio, we have essentially closed that gap. To put that in perspective, Section 351 products represented $8.1 million or more than 13% of net sales in the first quarter of 2021 compared to $377,000 in the current quarter. Our advanced wound care portfolio comprised of tissue and cord products used in wound care and surgical recovery applications grew $7.2 million, or 13%. Our traction in the surgical recovery market, which continues to gain momentum, fueled this double-digit growth. Gross margin for the quarter was 83.1% compared to 83.9% last year. Similar to many companies, we are seeing modest inflationary pressures on our materials and labor costs. Other factors, including higher yields and product mix, help offset these increases. Selling general and administrative expenses, or SG&A, were $49.6 million compared to $45.4 million. Increases in personnel costs, sales commissions, and travel expenses drove this change. Increases in personnel costs and sales commissions were the result of the Salesforce realignment and expansion. Additionally, our focus on sales of products into areas of surgical recovery results in a proportional increase in sales through sales agents. The increase in travel expenses reflects the removal of travel restrictions that the company had in place during the first quarter of 2021 due to the COVID-19 pandemic. After the end of the FDA's period of enforcement discretion, we made the strategic decision to maintain our staffing levels, including for our sales force, in support of our commercial growth objectives. As a result, the level of SG&A as a percentage of net sales is higher in the first quarter of 2022 compared to the prior year quarter and to our historical trends. In addition, due primarily to the annual reset of insurance deductibles at the beginning of each calendar year, net sales in the first quarter are typically lower than other quarters within a single year. We therefore expect the level of SG&A as a percentage of net sales to decline over the remainder of 2022. Research and development expenses were $6 million for the quarter compared to $4.3 million. The increase reflects higher personnel costs driven by increases in headcount to support clinical research efforts connected to our commercial and late-stage pipelines. Investigation, restatement, and related expenses for the quarter were $2.6 million compared to $7.2 million. The decrease was primarily the result of fewer legal fees advanced on behalf of certain former officers and directors of the company. Net loss for the quarter was $10.5 million compared to a net loss of $8.4 million. Adjusted EBITDA was a loss of $1.7 million compared to a gain of $5 million. As of March 31st, 2022, the company had $75.7 million of cash and cash equivalents compared to $87.1 million as of December 31, 2021. The decrease during the three months ended March 31, 2022 reflects payment of annual incentives as well as payroll taxes previously deferred under the Coronavirus Aid Relief and Economic Security Act. Looking ahead, on a full year basis in 2022, we continue to expect 11% to 14% growth in our continuing portfolio of products, which totaled $240 million of net sales in 2021. Additionally, as previously communicated, we expect to be free cash flow neutral in 2022, including the investments we are making to initiate our KOA clinical trial program later this year. I will now turn the call back to Tim. Tim? Thank you, Pete.

Before we open the call for Q&A, I want to take a moment to reflect on how Pharmamedics has come over the past few years. When I joined Memetics almost three years ago, we had some tough hurdles to overcome. Thanks to the hard work and dedication of our entire team, we have cleared our past litigation and accounting issues, reorganized the commercial business, and defined a path forward to registrational studies for our knee osteoarthritis potential blockbuster opportunity. Now we've established two business units by once again putting the right people in the right places with the right tools. The fundamentals of our patient and performance-oriented culture in our growth strategy are driving strong results across the board. As we continue to execute against our stated objectives, we are even better positioned for the future with operational resources, infrastructure, and expertise positioned for innovation and value creation. I believe the path we have chosen is the right one for memetics. Congratulations and a huge thank you to all 800 plus employees for their commitment to patients and exceeding performance expectations. Operator, you can now open the lines for our Q&A session.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 poll for questions. Thank you. And our first question comes from the line of Swami Ramakant with HC Wainwright. Please proceed with your question.

Thank you. This is RK from HC Wainwright. Good morning, Tim and Pete. Congratulations on a great start for 22. Thank you. So starting off, you know, on the business itself, obviously with the current growth on your advanced wound care products, you kind of wiped out you know, the 351 revenue loss slash decline. So when you're seeing such growth, I'm trying to understand why you're trying to be a little bit conservative still for the full year. You know, anything that you're seeing or thinking of that you could potentially see over the next couple quarters. So just trying to get a feel for it or just trying to be conservative because it's still the start of the year.

Okay, thank you. With us today, obviously, Pete and myself. We also have Dr. Kashyap and Dr. Stein, the presidents of our two operating units. I appreciate your question. I'm going to let Rohit take that.

Thanks, Alka, and good morning. I think we're very pleased with the results, obviously, in Q1. I think the infrastructure and the processes that we have put in place to drive execution for our sales team are working, and we saw that take effect in Q1 with our overall sales effectiveness model, the infrastructure we put around providing the sales team with tools, with training, The overall scale of our sales team, all of those factors contributed tremendously to our execution and growth in Q1. As well as some elements in the market as well, we saw robust demand. We see that execution continuing for the rest of the year and are confident that we can meet our earlier indicated growth rates and target for 11% to 14%. We do see there are some challenges as we go through the full year based on new launches, based on market entries into Japan and everything. So I think we have taken all those factors into consideration as we have looked at for the full year and we'll continue to keep you posted as those things become more and more clear throughout the year.

Thank you for that. Thank you, Rohit. The second question is on the product launch expectations. So regarding AmnioEffect, you said you would start off in a limited fashion from next month, but is PCM also going to be started at the same time or are you going to kind of stagger it, first start off with AmnioEffect and then A little bit later, you would start off PCM. I'm just trying to get a feel for that. And then also, how long of a period generally in the market do you think you'll need to do this limited launch kind of a situation before you go full steam with the both products?

Yes. Great question. I'll take MNU Effects first. So you outlined the timeline correctly that we will start with a limited market release in June. We have more than 20 unique sites lined up to participate in that limited market release. The reason for a limited market release for MNU Effects is it's a product that's going to be used in surgical procedures and That will be the first time it's really used on patients, besides animals or cadavers that we might have done in the lab prior to the launching. So we want to make sure that there are no surprises during the course of surgery when physicians and surgeons use it, and hence the need for a limited market release. We anticipate that limited market release for about 60 to 90 days before we can get to a full market penetration, sorry, full market access and open up the full market for the MNU Effect product. With regards to PCM, The product itself is different, used differently. We will not be doing an LCM, a limited market release for that product in June or even when we are ready to launch. We will be ready to launch that product in the second half of the year. And when we do launch, based on how the product and handling characteristics are for that product, we will be just ready to launch it on a full-scale basis in the second half of the year.

Thank you for that. Tim, one last question from me. It's interesting to see the strategy of trying to separate the two business subunits. At this point, are these just only operational divisions or you're trying to put some accounting also behind those and trying to do it both financially as well as operationally as two separate units?

Great question. First, the internal reorganization is designed to focus and align resources against the task for each of these two groups. As you can appreciate, Parke, the wound care and surgical recovery business, everything from the commercialization of those products to the product development cycle is much different than developing a drug for knee osteoarthritis. So it allows Dr. Stein to focus on our biologics group that's focused really on driving drug applications, or allows RoHIT to focus on driving our commercial business. Both are equally important. There is a certain amount of independence there, but there's also an important interdependency, particularly when you look at it from a regulatory product development, research, and so on. I'll let Pete address the accounting part of that question that you brought up, which is a good one.

Yes, thanks, R.K., and good morning. Formation of these units in and of itself doesn't drive the accounting as segment reporting, for instance, but it is something that is appropriate to assess, and we will be doing that here in the second quarter. Additionally, whether there are formal segments or not under an accounting standpoint, we recognize that investors always appreciate more granularity. So we do recognize this as an opportunity to provide some granularity regardless of the accounting answer.

Perfect. Thank you, gentlemen. Thanks for taking all my questions. I'll step back in the queue. All right. Thank you, RK.

Our next question is from the line of Anthony Petrone with Mizuho Group. Pleased to receive your questions.

Hi, and good morning, and congrats on another strong quarter of execution and closing the 351 gap from last year. I have a high-level question and a couple of follow-ups on the core and timelines. From a high-level standpoint, we're taking a closer look here at MiMedx. The stock is off about 70% or so from peak. Part of that, of course, was the top line data readout last year in September. Part of it is certainly market conditions from the end of last year through year to date. So with that said, as a backdrop, we're looking closely at valuation here, and shares are about one and a half times the midpoint of forward guidance. If you sort of take a blended average of therapeutics, med tech, and wound care, a comp group, you know, that peer set, you know, one could argue is at least two X higher, you know, than that one and a half forward sales, depending on the constituents. So, you know, maybe at a high level, you know, Tim, Dr. Stein Rohit, Pete, you know, what, what is the market missing here? One about the strength resiliency of the core business for one, and then two, the potential for the pipeline to yield value, you know, going forward, particularly within the NEOA indication and, and then I'll have a couple of follow-ups.

Yeah, that's a great question. Clearly, when you look at the peer group and you look what's happening in the biotech sector, clearly there's a dislocation. When you think about the fundamentals of this business, we've had three consecutive quarters of growth. And as you know, over the past three years, this company's gone through a significant amount of change, not only change in and personnel, but also significant change in the culture, which is now starting to drive the performance of the business. So I don't know exactly what is missing here from an investor viewpoint. Part of the internal change here to create the business units was to bring more clarity and granularity around the business for our investors. I think people can see how strong our commercial business is And when we look at the pipeline, we've had many questions about what is the size of the market? What is the peak sales? I can say this. Every large pharmaceutical company has worked to try, either through a small molecule application or a biologic, to crack the code on knee osteoarthritis. And nobody has been able to do that. It's a tough target. under the leadership of Bob Stein and his team, I feel we have done all the right things as far as building the foundational understanding of how to attack this particular progressive disease. And I'll let Bob talk a little bit about the efforts we've made there. And I'm not sure if that's been fully appreciated. Clearly, it's a substantial market. Today, there are 17.5 to 20 million patients suffering just on on knee arthritis alone in the US. When you scale that worldwide for knee and hip, it's over 300 million patients. So the epidemiology around this is why it makes it so attractive for other companies to take a look at this particular opportunity to help these patients. The labeling on this drug will be very important to drive the peak sales. For example, if you're injecting with, In a bilateral way, meaning you're injecting both knees at the same time, that's going to drive the revenue on this. If Dr. Stein's group is able to demonstrate in the clinic that there's a disease-modifying characteristic of this drug, then it's probably going to be used in a more prophylactic way. The top 10 drugs in the United States have sales that, if you just look at Humira, that $20 billion. The characteristics of the epidemiology, the understanding populations of patients that could be served with a meaningful drug here, makes this an extraordinary and novel opportunity for not only this company or any other company. The way we produce our product, I think, is a differentiating characteristic among all amniotic tissue. So all placentas may be created equal, but not all finished product is created equal. So Bob, I'll turn it over to you if you want to elaborate more on the NeoA program that's being under-recognized from an evaluation standpoint?

Thank you, Tim. I think it's a very good question, Anthony. And my belief is that last year in September, when we had the final results for all 446 patients in the Phase IIb NeoA trial, we were required, because it was material, to indicate that the overall study hadn't met its primary endpoint. And at that time, we didn't understand for certain why that was true. We saw a very clear signal in the first 190 patients that we had not only a statistically significant difference in pain and function compared to control, but it was a very clinically significant difference. And it was after one injection, six months worth of very good clinical results. And then in the next 256 patients, there was really no difference between the investigational product and saline and the clinical outcomes. And it took us a couple months to fully dig into that and convince ourselves that we understood what had gone wrong and that we were able to identify the fact that as the product aged from time of manufacture, it lost its potency with a pretty steep cliff starting at about two years post-manufacture. So there was a several month lag when it had the appearance that we had a failed study before we had an explanation for what might have caused that. And I think it also, people were distracted by that result from the fact that we had a very strong signal in the 190 patients that were first treated. So I think the other piece of that is that we've had to progressively develop insight into the possibility that the investigational product micronized DHACM, could modify the course of the disease. So it could slow down the rate of cartilage loss or even potentially lead to some cartilage buildback, which would have an important impact if it also was accompanied by the reduced pain and improved function that we've seen. And ultimately, it might allow patients to either delay the need for knee replacement or perhaps even avoid knee replacement. We have a lot of anecdotal evidence from the clinic and very strong preclinical evidence both from a mechanism of action standpoint and also animal model results which support our interest in the evaluation of the disease modifying activity. So I think that we have some very strong forward motion that we'll be able to talk about very shortly. We still intend to start a registrational trial before the end of the year. We're still on target for BLA filing in 2025 and potential approval in 2026. And of all the mechanisms that have been evaluated to try to alter the signs and symptoms of progression of NEOA, I actually think we have the most promising in the form of micronized EHACM based on both our preclinical and clinical experience. Thank you, Bob.

And Anthony, the performance of the business of our wound care and surgical recovery business. I think it speaks for itself. It has taken us a little bit of time for our organization to get its swagger back from a commercial standpoint, but we're there now, and we're going to continue to grow the business. That's important, so it'll help fund our clinical trials. We have other ideas about the application of our Micronyze DHACM product in other indications. as you all know, the placenta is a very sophisticated biological system that supports growth and healing. That's the attractiveness of this particular mechanism of action. And these are the things that we've been working on to demonstrate that not only does this product have a potential significant benefit in knee osteoarthritis, but when you think about other disease states that have an inflammatory component to them, where there is scarring and fibrosis formation. There are other applications for this across musculoskeletal diseases, as well as in the sports medicine area where you're dealing with trauma. So, Anthony, I appreciate your question there. As you can tell from my perspective, I do think that investors need to take a close look at the fundamentals of this, of our commercial business, and also take a look at the significant potential that our Regenerative Medicine Group is presenting here in the form of DOA and other indications.

Thank you for the thorough response. I'll just have two quick follow-ups here, and I'll keep it to the core and the pipeline. So within the core, the guidance this year is 11% to 14%. That's excluding, of course, the 351 headwind. However, there could be some easy comps due to COVID in there on the one hand, but As we look at the pipeline development, we have two new products coming and eventually entry into Japan and then a deeper pipeline. And so do you view the core business as a sustainable, you know, high single-digit, low double-digit growth story from here? You know, that would be question one. And then the second question would just be on the micronized DeHackam products, obviously stability issues. was an issue in the second, in the 256 patients. And so, can you quickly recap the specific changes the company is going to make to improve stability and really address some of the issues that came up in the 256 patients? Again, thanks again for taking my questions.

Yeah, you've got a couple questions in there. Why don't we allow Rohit to address the commercial question, and I'll have Dr. Stein address the stability, potency things.

Anthony, good morning. We absolutely do believe that we have, as we have outlined in our investor day, the ability to sustainably grow the business 11% to 14%. The drivers for that growth are multifaceted. We believe that our core business can continue to outpace the market and deliver growth in the core business, which is around wound care. and the application in wound. We have also talked about our ability to continue to penetrate an equally attractive market, which we are defining as surgical recovery. We are just in the beginning stages of that journey of ours, and so we will be able to grow into that market as well. The third aspect of driving the growth is innovation. As Tim talked about earlier, we are committed to launching two new products a year. We are now launching MNU Effect and PCM, both of those this year, but then we'll follow those up with a couple of other new products every year after that. In addition to that, in the comments that Tim made, was the strategic area of focus, which is Japan for us, which points to a very exciting opportunity for growth. When we look across all of those levels of growth and the investments that we have made in realizing the potential of those different levels, I'm very confident that we can definitely achieve that 11% to 14% growth on a sustainable basis. I'll hand it to Bob to talk about the stability.

Thanks, Rohit.

Thanks, Rohit. Anthony, we've been intensely focused on first understanding what was the difference in the material that was used in the first 190, the next 256, and then figuring out how to address the findings that we've uncovered. I'm very confident that we've done that and that we have a strong belief that the material will be evaluating will be in its active form and that the commercial product will also be distributed in a way that remains active during its use span. We've done that in part by reducing the shelf life from the putative five years that was initially believed to be accurate for the micronized product to two years. It still applies to the sheep products, the longer shelf life. But we've also made changes in the manufacturing and handling of the material that will also prolong its active condition. I don't want to give specifics on that because there are strong competitive advantages, but we're very comfortable that we've been able to address that.

Thanks again. Thank you, Anthony. Our next question is from the line of Carl Burns with Northland Capital Markets. Please receive your question.

Great. Congratulations on the progress. I think most of my questions have been answered. But I was just curious if you had any comments regarding sequential progression for 2022 as you provided at the end, at the release of fourth quarter results to align with the 11 to 14% year-over-year growth for the year. Thanks. And then I have a follow-up as well. Yeah, Pete.

Carl, it's Pete. Good morning. As Dr. Kashub said earlier, we've been looking at the launches, market entry in Japan, and just dynamics in the marketplace. Those evolve throughout as the year goes on. We're still generally comfortable with the specifics we talked about, and it certainly is all consistent with our annual growth. As you saw, we probably did exceed our own expectations this quarter, outperformed them. And just as Dr. Stein or Dr. Kashyap said, a series of items hit. Some hit one quarter versus another quarter, et cetera. So we're confident on our continued growth here year over year, and it's going to drive that 11% to 14% revenue range, as we've said, for this year.

Got it. And going back to the first quarter, the Section 361 products being up 13.4% year-over-year, I think that the initial guidance was mid-single digit growth for the first quarter. And hopefully this question is not redundant. Did you see any effect with respect to improvement of physician access mid-COVID pandemic that helped the first quarter, in addition to obviously benefiting from all of the strategic and sales and marketing initiatives? Thanks. Excellent question.

Good question, Carl. This is Rohit. Good morning. I think as we kicked off the year, again, there was probably limited access in several markets due to COVID. But as the quarter progressed, especially towards the end of January and March through February, we saw that the access was quite open. I think one of the other elements that definitely helps us in this market is that we have a balanced access across the hospital market, the outpatient wound care clinic market, as well as the physician practice market. Having that balance allows us to take advantage of what the market might be positioning itself as due to factors of COVID or other reasons as well. Being adaptive and being nimble in that sense, taking advantage of the best access and the best opportunities we have allows us to position ourselves well and serve the patients where they're presenting themselves in there. We expect that as the quarter develops that that's stabilized and it will continue to be at least in the near-term future as we think of our outlook.

Great. Thanks. Very helpful. Thanks, Carl.

Thank you. Our final question is from the line of John Endermosten with ZaxxSCR. Please proceed with your question.

Good morning, everyone. Regarding the two new business units, could you clarify for me where the two new products, which division the two new products will come from? And then also, I guess we can look at the regenerative medicine and biologics as the R&D components. center of the company. Is that a correct assessment?

Yeah, great questions. First of all, let me say that when you think about memetics, the wound care and surgical recovery group has a dedicated team that's focused on developing 361 products and 510Ks. As you know, the pathway to the market is shorter. We're able to innovate products in the 361 category and put those onto the market. This is absolutely important part of our growth strategy for our wound care and surgical recovery businesses. So those products, AMU Effect and PCM, are all organically developed inside our surgical and wound care business. So we have research, we have product development, and we have the regenerative medicine group, which is focused on the clinical side of this and also driving the research side. So I think your comment around Bob's area is highly focused on really developing out the biological piece of these drugs. It's really a drug focus. But in Rohit's area, we have a whole team dedicated to just producing products, if you will. And also in that area, we have a medical affairs team that will be conducting, if you will, more like phase four types of studies there to continue to provide the data that We need to grow that business. It also substantiates the reimbursement efforts that we have with payers. Let me just talk a little bit about the regenerative medicine focus. If there ever was a company in this industry that was focused on making regenerative medicine practical, that's Memetics. We have the talent here. We have an orientation. Bob's area looks at this business through the lens of a pharmaceutical or a biotech company. Why? Because that's the way the FDA is looking at it. Our discussions with them around classifying our injectable products or any products that are more than minimally manipulated are not used for a homologous use will be classified as a drug. So we had to build that infrastructure, if you will, to satisfy the regulatory requirement and also be able to operationalize our efforts, whether it's moving into a clinical trial or gaining registration approval there So I hope that helps, John, with clarification, but you're right. There's no commercial entity inside our regenerative medicine group there that's led by Bob.

Okay, got it, got it. And I guess I just, it sounds like there will be some R&D that will take place in Dr. Piship's division.

Yes. In fact, maybe we've just assumed that that was readily apparent. We really have two R&D functions here, one to support 361 products and one to support 10K applications. That's a different approach to this. But the thing that pulls this all together for us is the underlying research group can feed both of these organizations. So the products, the underlying mechanism of action doesn't change. How it gets formulated does change. And then that formulation really drives the regulatory status of these products. But, no, we're excited. It gives more intensity around hitting our goals by structuring us internally this way.

Okay, great. Yeah, thank you for the clarification. That helps. And I also want to get your take on inflation and its impact on the business. You know, I've been talking to you. A number of companies, and I hear about wages, CROs, CMOs, supplies, and a whole bunch of other things causing pressure. Where are you seeing the most and I guess also the least inflationary pressures today? Good morning, John.

It's Pete. For us, our primary raw material is a donated placenta from a consenting mother after a birth. Obviously, no inflation factor or supply chain issues in that. Where we see inflation having the biggest impact is on our labor, like a lot of people. Frankly, some of that inflationary pressure, and it wasn't called inflation early in this, came from the pandemic. Like a lot of other critical workers, our processing and manufacturing teams continue to come onsite Throughout the entire pandemic, we never shut down our facilities as a critical business. That team has done great work. We're very proud of the work they've done. It's been appropriate to recognize that through compensation. We all know that there's wage challenges and labor challenges out there. That's where we see it the most. We are seeing a little bit in some of our materials used in processing and some of our other indirect materials. But I'd say to the extent it's significant, it's in labor. And as we noted, or I noted in my prepared remarks, it's not overly significant for us in total. Obviously, with the gross margins, where they are, and the cost aspect of our product is somewhat limited.

Okay, got it, got it. That's good. Last question is on the surgical recovery. I think you had mentioned in some of the statements, the comments, that a large proportion of that goes through sales agents. So does that mean that it has a higher margin, I guess, because those costs aren't incurred directly by yourself?

So, John, your question on surgical recovery is, you know, what's the impact? We've talked about in the prepared remarks how there's a higher – that drives a little bit higher portion of our sales to the third-party agents. That is a different cost structure in the – in the commission area than through our direct sales force. When you look at the bottom line impact, you have to look at a variety of factors. When you look at commission and isolation, the commission expense is higher as a percentage of sales for the agents because you are compensating them for staffing, training, other costs that we incur elsewhere for our direct force. So that's why you see us talking about it in relation to commission expense itself.

Okay, great. Thank you for the clarification. That's all from me. Thank you. Take care. Appreciate it.

Thank you. We've reached the end of a question and answer session. I'll now turn the call over to Tim Wright for closing remarks.

Yeah. I wanted to thank everybody for joining this call today. As you can see, we had a fantastic first quarter. We're going to continue to... drive our sales throughout the remainder of the year. Sales are exceeding expectations because of our people and the tools that we have given them to sell our products that are based on clinical efficacy and health economic advantages. And frankly, the customers are appreciating the difference that our products make in their practice and that our people make. Regenerative medicine as a category is very inspiring to us, whether it's in the wound care business, or in the surgical recovery area, or in our regenerative medicine R&D focus there. Our regenerative medicine and biologics innovation operating unit is focused on changing the practice of medicine in DOA and other disease states. That's what gets us up in the morning. Our wound care and surgical recovery operating unit is growing double-digit, providing the fuel for this type of innovation. This to me is the dawn of a new era that we're driving called Placental Biologics. These are the discussions that we have with the agency. These are the discussions that we have internally, how we advance the science in this particular category. The sustained effort over the last three years has the potential to deliver significant growth in the future and value for not only our customers, but also for our shareholders and other stakeholders. Double digit growth, leading products, in our surgical wound care space. Our movement, our pivot into surgical recovery was an outstanding move for us because it allows to amortize the value of our existing products and allows us to innovate in other areas that can support surgeons with some of their complicated cases there. I just want to make sure that people walk away with an understanding that in Bob's area, What we're really doing here is creating a new class of biologics. It's a novel platform driven from placental tissue. If you think about it, placental tissue is Mother Nature's organic material that's evolved over millions and millions of years. That's why this mechanism is so important in disease states that have this inflammatory component. Addressing a treatment void in NeoA is a laser-focused goal of ours. We know that this product works in other disease states with similar pathobiology. If we're able to construct through clinical data, through our clinical trials, a package insert where we have strong labeling, we have a strong dosing regimen, an easy regimen for physicians to apply, where there's a bilateral potential or application, where there's prophylactic use. And if we characterize a disease-modifying element of our Purion-produced product, then there will be a significant multiplier effect on the potential of this novel organic material derived from human placental tissue and purified using our Purion process. Now, internally, we are working on a new manufacturing process under what I would call the code name Pyrion Triplex. This is a new engineering technology that supports the substantial efforts that we have to make in constructing a strong chemistry manufacturing and controls package as part of our BLA filing. It also affords us an opportunity to optimize our manufacturing process, improve the scalability. I want to thank our people here. We've had a good, strong quarter. I want to thank our investors for their continued interest in us and appreciate all the questions today. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.