MiMedx Group, Inc

Good afternoon, and thank you for standing by. Welcome to the MiMedx First Quarter 2024 Operating and Financial Results Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Notarianni, Head of Investor Relations for MiMedx. Thank you. You may now begin.

Thank you, Operator, and good afternoon, everyone. Welcome to the MiMedx First Quarter 2024 Operating and Financial Results Conference Call. With me on today's call are Chief Executive Officer Joe Capper and Chief Financial Officer Doug Rice. As part of today's webcast, we are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations website at MiMedx.com. Joe will kick us off with some opening remarks, and Doug will provide a summary of our operating highlights and financial results for the quarter. And then Joe will conclude with some additional updates. We will then be available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements, including statements regarding future sales, EBITDA, free cash flow, and cash balance growth, future margins and expenses, and expected market sizes for our products. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual results and market sizes will depend on a number of factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays, and other factors. Additional factors that could impact outcomes and our results include those described in the risk factors section of our annual report on Form 10-K, and our quarterly report on Form 10-Q, which we plan to file shortly. Also, our comments today include non-GAAP financial measures, and we provide a reconciliation to GAAP measures in our press release, which is available on our website at www.mymedics.com. With that, I'm now pleased to turn the call over to Joe Caffer. Joe?

Thanks, Matt, and good afternoon, everyone. We thank you for joining us on today's call, as we are very pleased to report the results of another outstanding quarter. As we communicated on our last quarterly call, we expected the momentum we generated in 2023 to continue into the first quarter of this year, and that's exactly what happened. In fact, as you will hear, the business performed even stronger than we expected in Q1, with revenue climbing at a rate of 18% year-over-year. On our year-end call a few months ago, we stressed the importance of the transformative steps we had taken in 2023 to establish a strong foundation from which we could build upon. That seems to be exactly what is happening. As a result of our leadership team's solid execution on our key initiatives, coupled with the debt refinancing completed in January, we are now operating with a much improved balance sheet and profitability profile. This provides far greater flexibility as we seek to establish additional growth drivers and strengthen our market position while remaining highly focused on being a growth-oriented and profitable med tech business. Given our success improving the financial profile of the company in a relatively short period of time, I am confident we have the right strategy to create substantial value in the business, even in the face of the typical regulatory and reimbursement uncertainty any health care business encounters. As an industry leader, we will continue to endeavor to shape conversations in these areas. Rest assured, we are working proactively with the help of outside advisors to do just that. Later in the call, we will provide our initial thoughts on the proposed local coverage determination that were published late last week and why we think this is ultimately a positive development for MiMedx in the coming quarters and beyond. But first, we need to take a few minutes to discuss our outstanding first quarter results and update you on the progress we made regarding our strategic initiatives. For the first quarter, net sales grew year over year by approximately $13 million, or 18%, to $85 million, marking another outstanding growth quarter. Gross profit margin improved to 85% in the quarter. Adjusted EBITDA was $19 million, or 22% of sales in the first quarter, representing an increase of $9.5 million over the prior year quarter. We acquired certain assets from Telebio and established a distribution agreement with Regenity, paving the way for the introduction of our first Xenograph product. As previously announced, we refinanced our debt facility under more competitive terms in January, dramatically improving our financial profile. We ended the quarter with $48 million in cash after using $30 million to pay down a revolving line of credit and $5 million to complete the telebio regenerative transaction, in addition to other Q1 cash obligations. And finally, we were pleased to be able to add two new directors during the quarter with the appointments of Tiffany Olson and Dorothy Pui, two highly accomplished individuals whose deep MedTech expertise will make them valuable assets to the board moving forward. Additionally, as we disclosed in our proxy filing last week, Dr. Phyllis Gardner and Dr. Michael Giuliani will not be standing for reelection at our upcoming annual meeting. Phyllis and Michael played pivotal roles in shaping the direction of the company during particularly challenging times, and we are incredibly thankful for their contributions over the last several years. Turning now to our strategic focus. On our last four quarterly calls, I provided updates on our progress executing on the following three primary growth drivers, which we laid out at the beginning of 2023. One, continuing to build on our leadership position in the wound and surgical markets by enhancing our product portfolio and expanding geographically. Two, developing opportunities in adjacent markets to create additional growth drivers. And three, building a discipline around expense management, rationalization, and continuous process improvement. I am incredibly pleased with the progress the team continues to make in these areas, which has fueled our success. Given the evolution of the business, we have refined our plan for 2024 and will provide updates around the following growth initiatives. First, we will continue to innovate and diversify our product portfolio to maximize growth. It has become increasingly clear that all of the sectors we serve within the wound and surgical markets are benefiting from the products we have brought to market. Over the last 18 months, we have introduced three new allografts, two geared toward the surgical market, AmnioEffect and Axiofil, and one for the private office, EpiEffect, the launch of which continues to exceed our expectations. All three products have been met with widespread market acceptance, and we have received exceptional feedback on the clinical benefits being derived from each. In fact, during the first quarter, we once again grew in all sites of service due in large part to the success we are experiencing with these products. And of course, we continue to have success developing our EpiFix business in Japan, where our sales grew by 146% in Q1, albeit off of a low base. We remain confident that this market will continue to develop into a meaningful contributor over time. This leaves me with two overriding themes to expect from us going forward. Number one, we need to continue to innovate products designed to meet emerging customer needs. This is a proven competitive advantage we must leverage. As we have experienced, our customer base will readily adopt the product when it hits the mark. Number two, the organization has a strong core competency at introducing new products into the various market segments. With this in mind, we hope to introduce as many as three more products over the next 18 months, one of which will be our first Xenograph product. This is a good segue to our second area of focus, which is to develop and deploy programs intended to expand our footprint in the surgical market. One of the rationales for suspending our knee OA program last summer was to redirect resources to better capitalize on opportunities in various surgical settings. There are tens of millions of surgeries performed in the US every year, many of which could benefit from the use of our products. While increase in our surgical presence has been of strategic importance, this year we are ramping up our clinical and marketing investments and refining this focus in select surgical settings where evidence is mounting as to the efficacy of our products. We added and will continue to add resources to our medical liaison group to improve our support in target areas. We are partnering with key opinion leaders to publish on outcomes in markets like neurosurgery for craniectomies, dermatology, pulmonary surgeries, and colorectal anastomosis. We are excited to fund these activities with the firm belief that the future for growing our footprint across a variety of surgical procedures remains bright. particularly as the body of real-world evidence for a wide range of applications continues to grow. And of course, with the upcoming launch of our first xenograft product, we will soon offer a more enhanced portfolio of solutions where such products may be more appropriate for various reasons. As a reminder, this is a 510 cleared bovine-derived collagen matrix particulate that is indicated for the management of moderately to heavily exuding wounds and to control minor bleeding. We expect to be ready for a soft launch of this product in third quarter with full market release later this year. Our third initiative is to introduce programs designed to enhance customer intimacy. You might wonder why this is of such importance that it rises to the level of one of our three most important strategic initiatives. The answer is simple. We want to lower our customer churn. In our markets, customer turnover is high relative to other industries, which impacts margins. We believe we have an opportunity to change this and build a much stickier association to an expanded customer-centric offering, thereby increasing the lifetime value of each customer. This will not be easy, especially when dealing with non-contracted price-sensitive markets. However, we plan to implement a series of interconnected initiatives designed to improve customer intimacy, embedding it into the DNA of the organization. To that end, during the first quarter, we were excited to launch MyMedics Connect, our new customer portal, providing a far more streamlined digital connection with referring practices, with many enhanced features and more in development. We are experiencing significant customer acceptance and enrollment far in excess of our initial early adoption projections. Before I turn the call over to Doug, I want to again provide a quick update on Axiofil and our path forward. As you will recall from previous communications, the FDA has taken a position that because Axiofil is manufactured as a particulate, it is more than minimally manipulated and therefore subject to regulation as a Section 351 product or biologic drug. As you will also recall, we followed the FDA's request for designation process at their suggestion. In response to both the pre-RFD and later the RFD, the agency maintained the position that Axiofil is a 351 product. They went out of their way in both responses to tell us why the 510 pathway is also not appropriate for Axiofil. This was all the more confusing since in February, the FDA issued a 510 clearance on a nearly identical human tissue-derived particulate product prior to sending our RFD response. There are now three nearly identical products in the market. One has a 361 designation, one has a 510 pay clearance, and Axiophil, which is being classified as a 351, requiring the most time-consuming and expensive path to approval. Our only available means for further appeal was to file a legal claim in federal court, which we filed in March. given the arbitrary and capricious manner in which the FDA is regulating these lifetime products. Because of the administrative nature of these proceedings, we expect the process to take a year or less at a cost estimated to be in the six figures. In the meantime, we will continue marketing the product, which, as a reminder, has an amazing safety and efficacy record. In addition to fighting the good fight for continued access to Axiophil as a 361 product, Our mitigation plan calls for the submission of a 510K application on a human tissue-derived product later this year. This product will have characteristics similar to AxioFill and the 510K clear product I referenced earlier. And as mentioned, because AxioFill revenue remains immaterial to our overall performance, we believe the launch of our Xenograft particulate could offset most, if not all, of any potential revenue loss if we ultimately fail to reach a resolution to keep axial fill on the market. Above all else, we hope this proceeding will shine a light on the need for regulatory clarity for the skin substitute market. Regulatory, clinical, and commercial stakeholders should all be aligned in providing patient access to safe and efficacious solutions in a reasonable and consistent manner. That may ultimately result in a transition toward an increased regulatory burden for many human-derived allografts. like a 510 clearance, which is a far more reasonable pathway than a 351 approval and a resolution we would support. Now let me turn the call over to Doug for more detail on our financial results.

Doug? Thank you, Joe, and good afternoon to everyone on today's call. Thank you for joining us. I'm pleased to once again be sharing another strong quarter of results with you all today. As a reminder, and as Matt mentioned, many of the financial measures covered in today's call are on a non-GAAP basis, so please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures. Additionally, as a reminder, during the fourth quarter of 2023, we bifurcated our GAAP financial reporting to reflect the current and historical results of our recently disbanded regenerative medicine segment as discontinued operations. Accordingly, my comments today on our first quarter 2024 results are made on a continuing operations basis and exclude the historical cost of the regenerative medicine business unit, which was suspended beginning in Q2 2023. For full discussion of the impact of these discontinued operations, please refer to our most recent 10-K and 10-Q filings. Moving on to our top line results, our first quarter 2024 net sales of $85 million represented 18% growth compared to the prior year period, reflecting our sixth consecutive quarter of double-digit top-line growth. Q1's performance demonstrates our continued momentum following a very strong 2023 in which we grew the business by 20%. Turning to our results by site of service, we continue to see growth across all of them, with a particularly strong contribution in the private office. We also saw good growth in the hospital setting, which, as you'll recall, was quite strong last year, driven by the sales of two of our newer products, AmnioEffect and Axiophil. Those products continued to grow in the first quarter of this year, albeit off of more difficult comparisons. Our other sites of care, which include International, VA, and other sites, were also strong in the quarter. Beginning this quarter, we will provide our revenues by product pack, specifically our wound products, which include EpiFix, EpiCord, and EpiEffect, and our surgical products, including AmnioEffect, and also our new Xenograph product that Joe mentioned, recently acquired through our agreements with Telebio and Regenity. In light of our evolving industry dynamics, the sales of many of our same products are across multiple sites of service, and our changing strategic priorities lead us to believe that this breakout, by comparison, provides a more consistent and meaningful view, and enables us to report our commercial progress more effectively. Our first quarter 2024 gross profit was $72 million compared to $59 million last year. Our gross margin was 85%, reflecting a roughly 200 basis point improvement from the first quarter of 2023. Gross profit was favorably impacted by higher sales levels, And our gross margin for the first quarter benefited from a more favorable product mix compared to the prior year. Based on our expected product mix, we expect that our gross margins will modestly decline relative to Q1 over the remainder of 2024. Turning to our operating expenses, selling general and administrative expenses, or SG&A, was $55 million, or 65% of net sales in the first quarter. compared to $52 million or 73% in the prior year period. We remain committed to achieving solid operating leverage as we grow the top line, even as our SG&A spend on a dollar basis will likely increase as we pay higher commissions as a result of higher sales, as well as increased stock-based compensation expense. Due to the timing of certain expenses in Q1 and continued sales growth, we expect SG&A as a percentage of revenue to decline moderately for the remainder of 2024. Our first quarter R&D expenses were $3 million, or about 3% of net sales, roughly flat compared to the prior year period. We continue to expect our R&D spend to modestly increase on a relative basis compared to 2023 to mid-single digits as a percentage of net sales. We mentioned last quarter that some of this R&D spend will be driven in part by investments in data generation for our products, and specifically on a robust trial for EpiEffect that we expect will confirm the utility we are seeing in the marketplace as an important wound care solution. GAAP income tax expense for Q1 2024 was $2 million, reflecting an effective tax rate of 21% compared to a negligible amount in Q1 2023. Our effective tax rate, as compared to statutory tax rates this quarter, was favorably impacted by stock-based award vestings. By comparison, our income tax expense in Q1 2023 was negligible due to valuation allowances. As a reminder, we will continue to use a 25% long-term adjusted effective tax rate to report adjusted earnings. Our first quarter GAAP net income from continuing operations was $9 million compared to a net loss of $2 million in the prior year period. Adjusted net income for the quarter was $10 million or 7 cents per share compared to a loss of $3 million or 3 cents per share in the prior year period. First quarter 2024 adjusted EBITDA was $19 million or 22% of net sales compared to an adjusted EBITDA of $9 million or about 13% of net sales in the prior year period. Turning to our liquidity, our first quarter cash and cash flow are typically impacted by revenue seasonality as well as customary compensation and other seasonal cash outflows. In the first quarter of this year, we also repaid the $30 million borrowing under our revolving credit facility that we had drawn on as part of our refinancing earlier in the year and we made a $5 million payment to Telebio related to our product portfolio expansion into Xenographs with Regenity Biosciences. As a result of all this, at the end of Q1, the company had $29 million of net cash, and we continue to demonstrate solid free cash flow conversion with $5 million of free cash flow during the first quarter compared to an outflow of $5 million in the same prior year period. I will now turn the call back to Joe. Joe?

Thanks, Doug. As you have just heard, we had another outstanding quarter, once again exceeding expectations. Net sales were $85 million, up 18% in the quarter, whereas profit margin increased to 85%. Adjusted EBITDA was $19 million, or 22% of net sales in the quarter. The again grew in all sites of service. We financed our debt and acquired the rights to commercialize our first unit of product. Now let me turn to the Local Coverage Determinations, or LCDs, that were proposed in unison by all seven of the Medicare administrative contractors late last week, in effect creating the equivalent of a national coverage policy. Similar to last year's proposal, the new LCDs call for a utilization cap of four skin substitute applications per case. Importantly, this year's proposal allows for additional applications based on medical necessity in instances when A patient's wound needs more help achieving closure. The proposed LCDs also, again, significantly limit the number of products approved for reimbursement at 15 based on published non-biased clinical evidence, while the non-approved product list specifically prohibits reimbursement for nearly 180 other products currently on the market. There will be a comment period which will end on June 8th. and the LCDs will be finalized and go into effect sometime thereafter, likely not later than October 1st if they follow the same timeline as last year. What does this mean for my medics? Two of our products, including our flagship EpiFix product, are among the 15 approved for reimbursement. Unfortunately, EpiEffect is not on the list due to a lack of sufficient published evidence to date. This is simply a matter of timing. Even before the recent announcement on these LCDs, we had committed to funding and have designed highly powered randomized controlled trial for EpiEffect, which will soon be underway. Additionally, we have been building a strong body of real-world evidence since market introduction. As such, we will engage directly with the MACs and CMS in order to ensure the most expeditious path to qualify EpiEffect for coverage. If implemented as proposed or even in a slightly modified format, these LCDs will certainly cause some level of disruption in the market, at least in the short term. However, given the balance of our business portfolio, our commitment to evidence-based medicine, and our much improved financial profile, I believe we are better positioned than most to navigate the changes and expect us to benefit in the longer term under this new reimbursement structure. The bottom line is that something clearly had to be done. The blatant abuse of the payment system and the cost inflicted on Medicare Trust Fund has gotten way out of hand. We've been fairly vocal about the need to clean up the bad behavior in this market for some time while ensuring continued access to much needed healing solutions. We will continue to provide input as this will most likely be an evolving situation. In terms of guidance, we will not be making any changes at this point given what has been communicated. Were it not for the potential disruption associated with the proposed LCDs, we would have been able to raise guidance based on the outstanding quarter we just had. And we believe when everything is finalized with the LCDs, Biomedics will be in a strong position to compete and grow our share in the market for advanced wound care products. We will keep you informed as we learn more. Importantly, these LCDs do not affect the efforts and strategy underpinning our surgical business, which we think has a bright future with a large and growing addressable market, particularly as we expand our product portfolio. In closing, I would like to congratulate and thank the entire MyMedics team for delivering another excellent quarter. I am confident we will navigate any potential changes in the market and continue to stay focused on helping to improve the lives of the many people who are treated with our products. With that, I would like to open the call to questions. Operator, we are now ready for our first question. Please proceed.

Thank you. We'll be conducting a question and answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star two if you'd like to withdraw 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. Thank you. And our first question comes from the line of Chase Knickerbocker with Craig Hellam. Please receive your questions.

Good afternoon, guys. Thanks for taking the questions. You know, we saw a little bit of disruption in the wound care market last fall when the LCD was, you know, first released. What are you hearing from customers and kind of how are you guys thinking about how the market's going to react to this? And then particularly around at the effect, do you expect any kind of change in physician behavior as far as adoption goes with that product, considering it's on the not covered list as it sits today?

So the first part of your question is what we're hearing. It's kind of early on, Chase, to have heard too much. But let me just start by saying this is a change that we welcome, even if there is some potential short-term disruption. As we mentioned, we've been advocating for change in this market segment for some time. And frankly, we see this as a step in the right direction. Look, reimbursement changes are typical in health care. I've lived through them several times in the past, and we will navigate through this. I strongly believe that when the dust settles, there will be more upside than any potential downside for my medics. If you look at the market today, approximately 60% to 80% of the private office volume is going to the nearly 180 products that are no longer going to be permitted to be reimbursed. So that's a lot of share. It's frankly up for grabs. As far as EpiEffect is concerned, I said during my comments that it's really a matter of timing. We had been working for some time to put in place a randomized controlled trial on that product, as is our habit. When we get a marquee product that comes to market, we like to invest in the evidence to prove efficacy. That trial will start to enroll patients in June. Even before the comment period is over, we're going to have a trial well underway. Clearly that will be communicated to the MACs and to CMS. So we can't predict if and when, but we're pretty confident that we're taking all the right steps to ensure that the effect remains in the market. So again, on the other side of this change, this is a good thing. The industry will have cleared a major uncertainty, which I believe is an overhang on value today. And as an industry, it will just be a much more attractive investment thesis, but that's your business. You'll determine that. Look, I see this across the board as a positive. As we learn more, if it requires us to make adjustments, we'll make adjustments. But if you look at the balance of our current business portfolio, if you look at the changes that were made to the business over the last year, the much improved balance sheet financial profile, I think you'd be hard-pressed to find a company that's in a better position to navigate this than us.

Yeah, and as we kind of think about kind of that long-term kind of benefit that you just kind of talked about a couple times in your prepared remarks and just in that answer there as well, how do you guys kind of quantify that benefit? I know you just said kind of 60% to 80% of that private office volume is in those non-covered products. Can we dive in a little bit deeper there and kind of help us quantify what that volume is from a numbers perspective? And then obviously you would certainly expect that to come to the, you know, 15 products that are on the covered list and maybe speak to your kind of competitive positioning there as far as how you're positioned to potentially, you know, grab the majority of that share that becomes available.

Yeah, difficult to quantify a valuable market at this point. As you can imagine, a lot of that market dollars are due to inflated pricing. And then my guess is there's a certain level of over-utilization. So when new regs are put in place, I think you're going to see a much smaller dollar TAM, but probably a slightly smaller volume TAM as well. So hard to quantify at this point. Importantly, even before we launched at the effect we were picking up share in private office as some of the other competitors were moving the product on the ASP price list and some of the rebating and discounting, some of that behavior was starting to slow down a little bit. So that was likely driving some of our performance as well as just better execution within the sales organization. Look, I think you'd be hard pressed to find a product on that list that has as much evidence and as much market acceptance as our products, in particular, Empty Fix. So, look, we feel real good about where we are today and the opportunity moving forward. But, again, I would say back up, look at it from a macro level, very good thing for the industry to get this behind us.

And then just quick, one more on kind of the impact here, and then a question on kind of the effect trial. If we kind of look back to the fall, there was some kind of impact on those that were on the not covered list. Do you think there's a chance that you guys could kind of pick up the volume as people kind of adjust their behavior ahead of time of this going effective? And then just to go on the EpiEffect timing for that trial, how long would you expect it to basically get results? And then do you know exactly kind of how that conversation would go with CMS on when you could get on that covered list assuming this goes effective? Yeah.

We will start those conversations almost immediately, and it will be in our comments, and when we have an opportunity to meet with them, we'll talk about it. We're committed to funding the entire trial. I believe it's going to last somewhere around a year, but there will be points along the way where we will get interim readouts, so we'll have good data along the way. the trial will likely produce four or five published papers. So it'll put a lot of good evidence into the literature. So we feel pretty good about it. And again, this is a commitment that is not new for us. We've been doing this. This is a practice of the company. Long before my time here, Chase, the company has been committed to evidence-based medicine.

Got it. Thanks, Joe. Thanks for the question, Scott.

Our next question is coming from the line of Brooks O'Neill with Lake Street. Please proceed with your question.

Good afternoon, guys. I appreciate all the comments on the LCDs. Obviously, it's a moving target here. But one thing I'm just a little curious about is if I'm listening sort of to your, the nuances of your comments, you expect any potential disruption in the short term to be a negative for my medics, and I'm just curious why you think that.

Well, Brooks, I'm sorry if I communicated that to you. I think it's going to be potential disruption for the industry. If it changes behaviors to the point where it impacts us, I think we're in a much better position to navigate through that. I don't see it as a much of a near-term threat or, frankly, mid-term or long-term threat. Mid-long is obviously a plus-plus, as I indicated. That's the way we view it. We didn't change our guidance because there's some unknowns, right? We still have to work through this process and see what ultimate form this takes and when it is ultimately enforced or rolled out. So that date has not been determined yet. And again, we don't know what the final format is going to look like. This may be tweaked somewhat before it's actually implemented. So I think the prudent thing to do is just say we're not changing guidance at this point. And as I indicated in our prepared remarks, given the way we came out of the chute in the beginning of the year, had it not been for this, in all likelihood, we would have tweaked the guidance up a little bit.

Yep. All that makes sense. Okay. I want to shift gears. Obviously you've commented about the opportunity you have on the surgical side of the business and your excitement about, you know, pursuing growth opportunities there. Can you talk just a little bit about some of the near term things you, you think are big opportunities for you? And then I'm curious. Obviously, I know there's a big market for xenografts, but that's a little bit of a departure for mimetics relative to history. And just talk about some of these alternate, I'll just call them alternate source products, just recognizing many of them are not, I mean, they're not human-derived products. So how big an opportunity do you see in Stuart, what do you think is your pass to go after that?

Based on market data available to us, it looks like the xenograft and synthetic portion represent a little bit more than half of the skin sub-market. And then the amniotic products are probably in the 43% to 45%, which is really the only place we played today. So it opens up a lot more opportunity for us. So your question about it's not something that we've done in the past. Same channel, though, Brooks. It's the same commercial channel. And there's cases where we don't win because for one reason or another, a hospital prefers to use non-human derived tissue. This gives us something in the bag to compete in those instances. Look, we clearly believe and will continue to develop in the production of additional human-derived tissue and placental-derived tissue because we see the results of it. We know it works. We know it's far superior to anything else out there. But you have to have offerings for different needs. So this is a step that we're pretty excited about.

Absolutely. That makes sense. And it just popped into my brain, and this will be my last question, is obviously I think there's some international markets where xenografts are favored or have a strong position. So just talk a little bit about what you see and what your plans are for attacking the international market.

Yep, you're exactly right. It gives us another arrow in the quiver internationally. Some of the markets are much more difficult to penetrate with only a human dry tissue. As you know, we're having success in Japan, but that's taken us quite some time to develop that market, and we're starting to pick up some steam there. I indicated that we had a nice growth rate, albeit off of a relatively low base, but we continue to enroll more physicians, and physicians continue to repeat order the product. which is really, really good to see. So we expect that to continue well. And there's other international markets that we're starting to look at, but too early to report on. But clearly this gives us more opportunity as we look to develop markets abroad.

Absolutely. Great quarter. Great job, Joe. So excited to be following what you're doing. Well, Brooks, we're glad to have you. Thank you. Thanks.

Our next question is from the line of Anthony Patron from the Mizzou Hill Group. Pleased to see you with your questions.

Thanks for taking the questions. Congrats, too, on the very strong performance. One cue, you're out of the gate. Maybe back to LCD, and I'll have a follow-up on xenograftaxia, Phil. On the, I guess when we look out, you're breaking out U.S. Physician Office now. You did a little over $30 million in the quarter. Now, how much of that U.S. physician office today is EpiFix and EpiCord versus EpiEffect? You know, so just looking at what's on the covered list versus non-covered list in that 30 million 1Q U.S. physician office number, and then I'll have a couple follow-ups.

Yeah, I think we can talk about that.

Anthony, I'll just start by saying thanks for the congratulations. We're excuse me, super pleased with the way we started the first quarter. With regards to private office mix, we really aren't breaking out individual products, but it's clear since we launched EpiFX at the beginning of Q4 that it's certainly a big contributor to the growth in our private office space.

And if you go back and look at like Q2, Q3, we were growing in private office with EpiFix. So you can see, you can go back and calculate the delta, but it's... The portfolio of products continues to grow in that sector, and we think that we're well-positioned to continue to do so. And again, as I indicated, we're going to work real hard to make sure EpiEffect is accessible as well.

The only thing I'd add, Anthony, is it's only the second quarter launch of EpiEffect. And EpiFix, as Joe mentioned in the prepared remarks flagship product, is head and shoulders to the rest of the portfolio.

That's helpful. And then, Joe, helpful on quantifying here 60 to 80 percent of the activity, let's say, using a base year of 2022 or maybe even 2023, you know, within those non-covered products. You also mentioned that, you know, there's some overutilization and some pricing, you know, in that number when I think you look at that 2022 Medicare number that was north of a billion dollars. So is there any kind of rough estimates on what you think has been out there in terms of overutilization and premium pricing, just to kind of level set what we think was in that 1.1, 1.2 billion CMS 2022 number for U.S. Physician Office for skin substitute products?

Yeah, that was 2022. Lord knows what 23 looks like. We haven't seen that number yet, so my guess is that's much higher. I can't bifurcate to volume versus price. I would say the majority of it is probably price. This is based on what we have seen in the marketplace. I just put the cautionary comment out there that if you take the price equation out, it's probably logically, Anthony, there's some overutilization, right? Because I've seen it in every part of health care that I've ever been in. When the economic incentives are that overwhelming, People do some crazy things.

And then just on that prior authorization extension, it doesn't appear that it's overly onerous for clinical evidence. You know, are you thinking that can be a major hurdle? And then the last one, I'll just sneak in. When we look at xenograft coming in and axiophil, you know, basically, under the warning letter at the moment. I think the Axiophil number you guys quoted exiting last year was roughly around 5 million. Is that number still right and how much do you offset that with the addition of Xenograft? Thanks.

Just numerically, Anthony, we sort of ring-fenced that as less than 5% of our total revenue in terms of Axiophil contribution.

Okay.

I'll let Joe. respond to sort of clinical evidence requirements that we expect around the proposed LCDs?

Yeah, I don't see that as a burden needing to get some pre-offer for medical necessity, or at least, I don't know if it's going to be a pre-offer, but documentation around medical necessity to navigate audits, et cetera, et cetera, and get payment. I just don't see that as overly burdensome for those cases where it will be appropriate. And then your other question about actual fill of Zeno.

What does ZenoGraph bring in from a 12-month standpoint?

We're not putting out that projection yet. I will tell you that I feel pretty good about it. The work that's been done for the market development team, we like the position of the product and we think it's going to be fairly well accepted. And look, I would go back and say this company has launched three products in the last 15 months. All three products have been pretty darn successful. So we may not be perfect at everything, but the commercial organization has a fairly well-tuned muscle around launching new products. And so I feel highly confident that we'll have a level of success with this product as well. And Axial Phil, hit some headwinds early in 2023 when this started to come out, when we started to deal with this. So I would imagine had I not been dealing with this throughout 2023, that product would be much larger than it is today. So we feel pretty good about it, and we talked about other steps we're taking to mitigate any potential loss revenue there.

Thank you again.

Our next question comes from the line of Carl Burns. with Northland Capital. Please receive your questions.

Thanks for the question and congratulations, Ankur. Most of my questions have been answered around the LCD in terms of the 60 to 80% that would be up for grabs. I guess a follow up there is, you know, kind of looking at the players in the space, do you see any potential for some of the companies to end up in, you know, financial struggles where they may be desirable M&A candidates to tuck under and blow out their infrastructure? Is that something that's been contemplated? Thanks.

Yeah, I don't think I would comment too much on that, Carl. Look, I'm not going to wish misfortune on other people. I would say that I feel a lot better from an opportunity standpoint where our financial profile is today versus one year ago when we were dealing with the same type of issue. So we'll see what happens. There may be opportunity, but I think it's too soon to talk about it. Fair enough. Thanks.

Our next question is from the line of RK from AC Wainwright. Please receive your question.

Thank you. Good afternoon, Joe. One quick question on LCD. Is this something that's going to be reviewed every so often or annually? And if for some reason you're unable to convince these folks because you won't have the data in hand by the time it gets reviewed. How soon can that get reviewed again if they're really required to see final clinical data?

Yeah, first part of your question about whether or not we're going to be dealing with something like this annually, clearly there's a reset on the physician fee schedule annually. It has a well-known cycle, proposed rules being in July sometime, usually final in November time frame-ish, and then implement it thereafter. So we'll be part of that cycle from a pricing standpoint. Coverage determinations typically aren't reset every year. Clearly, Medicare and the MACs are dealing with, frankly, a runaway cost issue in this category because of all the bad behavior out there. People were taking advantage of loopholes and over-billing the system. These are steps, I believe, that they were taking specifically to attempt to address that. This might not be perfect. RK might have to go through some iterations before it settles down. Again, as I said a couple of times, this is pretty good for us and pretty darn good for the industry. Pretty good for the Medicare Trust Fund and for patients who are on the hook for co-pays when they're being charged well in excess of what they should be charged for a skin substitute solution. So all this is good and it's really good for the industry to clean this mess up.

Okay, thanks for that. And then in terms of the Xenograph product which I'm bringing on board, I know you said you could not come up with the guidance for the next, you know, for Anthony's question regarding forward tournaments. But in general, how, you know, when you bring in a product like this, how long does it take to integrate itself into your commercial structure in such a way that it can become meaningful and also maybe even better than what Axophil was doing, you know, which was like level. less than 5% or around 5% of your revenue run.

Probably too soon for me to provide color there. Let's wait until we get the product in the market, see what kind of acceptance we have. As I indicated, I have little to no doubt in the organization's ability to get the product into the marketplace, but let's wait and see what kind of acceptance it has. I suspect it will be a well-received product based on what we know so far. So I'm pretty optimistic about it. More to come on that.

Perfect.

Thank you.

Thanks for taking my question. Thanks, okay.

Appreciate it.

Our final question comes from the line of John Vandermosten with SACS. Pleased to see you with your questions.

All right, thank you, and good afternoon, everybody. I'll start out with just asking about the preparations that are required before you start selling the Regenity Xenograph product. What do you need to do before that gets in the hands of your sales team?

Well, as you know, it was a developed product with a 510 clearance in place. And there was a certain amount of work that had been done from a clinical perspective as well. So, you know, we had a good running start when we acquired it. And so there's, you know, pricing, GPO contracting, you know, training, et cetera, et cetera. A lot of that's been underway. So when we talk about kind of a soft launch in early Q3, we're pretty comfortable with that timeframe. And then you start to – once you put the product in the market, you'll learn a little bit, you'll make adjustments, et cetera, and then you'll move more into a full launch phase a little bit later in the year.

And your new platform to – your new sales platform that you announced a few weeks ago, Do you think that'll help accelerate the penetration of the product to your customers?

Hard to say if that will drive it. I think we're excited about that just because from a practice workflow standpoint, it's a much improved tool. And so when I talk about driving higher levels of customer intimacy, using technology is one good way to do it. And so we're pretty excited about that. That's just from an overall process improvement standpoint. I don't know that it drives a new product like this. I think they're probably a little bit different.

Yeah, I would say MyMedicsConnect is certainly a terrific tool that puts our customers' hands on, but it's mostly focused in wound care center and private office environments versus hospital environments.

Got it. And when you look forward to, I guess, incremental unit sales, Do you think that that'll come from better sales productivity per salesperson, or do you think additional headcount will drive that incremental unit sale?

You know, when you scale an organization, a sales organization, it's both. You know, you're looking for improved productivity. We talked about this, I think, on our last call. The productivity per sales FTA is up dramatically year over year. We talked... 2023 revenue grew by about 20%, which was 100% volume-driven. And if you look at Salesforce productivity, that was probably nearly double that because we were doing it with less FTEs. So, yeah, as you scale, you should get improved productivity, and then obviously you're going to look to continue to resource the organization opportunistically. Where there's opportunity, we'll continue to invest.

Got it. Regarding the EpiEffect trial and the costs related to that, are those already baked into the previous guidance that you provided on the R&D side for costs?

They are, John. It's a really good question, but while we had a modest spend in Q1 at 3% of top line, we would expect for the full year for that to pick up to mid-single digits, so rolling north of 3% in Q2 and certainly in the back half of the year as that trial and other activities get underway.

Great. Thank you for taking the questions.

Thank you. Thank you. At this time, I'll turn the floor back to management for closing remarks.

Thanks, Operator. Appreciate it. Appreciate all the questions today, guys, and appreciate the support for the company. We're going to go ahead and wrap up the call, and we'll talk to you next quarter. Thank you.

This will conclude today's call. Thank you for your participation. You may now disconnect your lines at this time.