In its second quarter 2024 earnings call, MiMedx (MDXG) reported a 7% increase in net sales, reaching $87 million, despite facing competitive challenges and regulatory hurdles. The company's growth was driven by the strong performance of its AMNIOEFFECT and EPIEFFECT products, as well as the launch of its new bovine-derived product, HELIOGEN.
While the company has faced employee and customer turnover due to competitors offering artificially high-priced skin substitutes, CEO Joe Capper expressed confidence in the company's ability to overcome these obstacles.
MiMedx updated its full-year revenue growth guidance to mid to high single digits and remains optimistic about the future, with plans to expand its product portfolio and capitalize on market opportunities.
Key Takeaways
- MiMedx reported a 7% year-over-year increase in net sales to $87 million for Q2 2024.
- Challenges included tough comparisons to the previous year, competitive behavior in the private office setting, and an ongoing FDA matter with AXIOFILL.
- The company saw strong growth in AMNIOEFFECT and EPIEFFECT products and launched HELIOGEN.
- Gross profit was $72 million with an 83% gross margin; adjusted EBITDA was $20 million.
- MiMedx is confident in navigating current headwinds and achieving long-term success, with a focus on the surgical market and customer intimacy.
Company Outlook
- Full-year revenue growth guidance updated to mid to high single digits.
- Implementation of proposed Local Coverage Determinations (LCDs) expected to address reimbursement issues.
- Plans for no upside with LCD implementation but expects an uptick in business once implemented.
Bearish Highlights
- Sales of AXIOFILL declined due to an ongoing matter with the FDA.
- Employee and customer churn in the private office setting due to competitive behavior.
- No clear indication of when or how proposed LCDs will be implemented.
Bullish Highlights
- Strong growth in AMNIOEFFECT and EPIEFFECT products.
- Successful launch and limited market release of HELIOGEN.
- The company continues to generate strong free cash flow, increasing the net cash balance to $50 million.
Misses
- The company faced challenges in the private office setting due to competitors' artificially high-priced products.
- Adjusted net income was $11 million, with GAAP net income driven by resolution of matters involving former officers.
Q&A Highlights
- CEO Joe Capper believes the worst of customer attrition and employee turnover is behind them.
- Capper expressed confidence in the company's ability to navigate challenges and grow the top line with a strong adjusted EBITDA profile.
- The company is in discussions with stakeholders regarding the setting of rules and regulations for their products.
- Plans to expand the product portfolio of Xeno, with a variety of SKUs to meet market needs.
MiMedx continues to navigate a complex market landscape, balancing growth and innovation with regulatory challenges and competitive pressures. The company's leadership remains positive about the future, focusing on strategic product rollouts and market opportunities. As MiMedx prepares for the next quarter, stakeholders will be watching closely to see how the company's strategies and market conditions evolve.
InvestingPro Insights
In the wake of MiMedx's second quarter earnings report, InvestingPro data and tips offer additional perspectives on the company's financial health and market position. With a market capitalization of approximately $1.1 billion and a P/E ratio of 16.05, MiMedx is valued by investors who are anticipating growth. This valuation is further underscored by a robust revenue growth of 19.2% over the last twelve months as of Q1 2024.
InvestingPro Tips highlight that MiMedx's stock price movements have been quite volatile, which may interest traders looking for short-term opportunities. However, for long-term investors, it's notable that the company's liquid assets exceed its short-term obligations, suggesting a degree of financial stability. Additionally, MiMedx operates with a moderate level of debt, which could be a sign of prudent financial management in a competitive and regulatory-intensive industry.
InvestingPro users can find more insights on MiMedx, with a total of 7 additional InvestingPro Tips available at https://www.investing.com/pro/MDXG. These tips may provide further clarity on the company's financial metrics and future profitability, which analysts predict will be positive this year. With the company not paying dividends, investors may be more focused on capital gains and the company's potential for reinvestment in growth and innovation.
The InvestingPro Fair Value estimate of $7.84 suggests that the stock is trading close to its intrinsic value, which could be of interest to value investors, especially when compared to the analyst target fair value of $12. This discrepancy may indicate different expectations about the company's future performance and the potential for price appreciation.
Full transcript - MiMedx Group Inc (MDXG) Q2 2024:
Operator: Greetings and welcome to the MiMedx Second Quarter 2024 Operating and Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Notarianni, Head of Investor Relations. Thank you, sir. You may begin.
Matt Notarianni: Thank you, operator, and good afternoon everyone. Welcome to the MiMedx second 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 a summary of our operating highlights and Doug will provide a review of our financial results for the quarter. And then Joe will conclude with some additional updates including a discussion of our financial goals. 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, adjusted 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 reports on Form 10-Q. 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 mimedx.com. With that I'm now pleased to turn the call over to Joe Capper. Joe?
Joe Capper: 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 solid quarter. For the second quarter, we continued to achieve year-over-year top line growth, albeit at a slower rate. There are two factors that impacted the magnitude of our growth; first, we had a very tough comparison due to our strong performance in Q2 2023; and second, there continues to be dislocation in the private office setting caused by certain competitors and providers utilizing artificially high-priced skin substitutes and questionable business practices targeted at Medicare beneficiaries. While less than 25% of our total revenue is tied to Medicare in the private office and adjacent settings, we have felt the impact of this behavior. I assure you we are working on various options in the event no action is taken to curtail these practices. I will speak more on this topic later in the call. Importantly, the remainder of our business continues to flourish. We believe our industry will and must return to a more rational, data driven, regulatory and reimbursement environment. In the meantime, it is important to realize just how well we have positioned MiMedx to navigate these short-term headwinds and we expect to emerge on the other side stronger than ever before. Over the past year, we have orchestrated a significant financial transformation for our company and we remain laser-focused on executing our strategy, which will ensure success for years to come. This much improved financial profile enables us greater flexibility and optionality as we navigate near-term disruption. Moreover I am confident, we have the right plan and team in place to continue our momentum. As an industry leader we continue to provide input and lobby the relevant governing bodies in an effort to help restore good fiscal governance to the Medicare portion of the private office setting. Now, I'll take a few minutes to discuss the highlights of the second quarter and then update you on the progress we are making regarding our strategic priorities. For the second quarter net sales grew year-over-year by $6 million or 7% to $87 million, marking another solid growth quarter. Gross profit was 83%. Adjusted EBITDA was $20 million, or 23% of net sales in the quarter, representing an increase of $6 million over the prior year period. We ended with $69 million in cash, a healthy increase of $21 million in the quarter. We began the limited market release of HELIOGEN which is the commercial name for the bovine-derived particulate we acquired earlier in the year. We were thrilled to announce the well-deserved promotion of Kim Moller, the Chief Commercial Officer for MiMedx. Kim has done a remarkable job over the last four years, building the MiMedx commercial organization into the high-performing team it is today. And a few weeks ago we were excited to have Nature's Scientific Reports which is a leading peer-reviewed journal with a reputation for publishing best-in-class scientific literature, publish a study demonstrating the benefits of MiMedx placental-based allografts in surgical applications where pathological fibrosis results in detrimental scarring and dysfunctional tissue. Turning now to our strategic priorities, as outlined on prior calls our plan is focused in three areas. First, we will continue to innovate and diversify our product portfolio. We have clearly built a strong core competency in the development and rapid commercialization of products designed to meet emerging physician and patient needs in all sites of care. Two, of our most recent product introductions, continue to perform at a high-level. AMNIOEFFECT grew nearly 40% year-over-year in the surgical market; and EPIEFFECT which, we launched late last year continued to show significant strength in the private office. Both products have received widespread market acceptance and excellent physician feedback. Additionally, we continue to make progress building our EPIFIX business in Japan where we posted another quarter of exceptionally high growth. Building on the success of these recent product introductions, we expect a similar performance as we move towards full market release of our first xenograft. As a reminder this new product is a 510(k)-cleared, bovine-derived collagen matrix particulate which we have branded HELIOGEN and is indicated for the management of moderately to heavily exudating wounds and to control minor bleeding. During our soft launch the product has been successfully applied in various surgical procedures including Achilles tendon rupture. That takes me to our second area of focus which is to develop and deploy programs intended to expand our footprint in the surgical market. In the past we've spoken about the importance of generating real-world evidence and scientific research demonstrating support for the use of our placental-based allograft in a variety of surgical procedures. We are currently working with key opinion leaders to produce evidence in surgical case studies, as we know data is especially critical in this part of the market. To that end, the Nature-Scientific Reports article, I mentioned earlier is one of the more exciting and significant publications we have seen in quite some time. The prestige of this journal alone demonstrates the importance of the work. This study evaluated two configurations of MiMedx's proprietary placental-based allografts for their ability to regulate fibrotic processes or scarring of connected tissue. The study found that both our dehydrated and lyophilized human amnion/chorion membranes demonstrated in-vitro modulation of collagen production deposition and maturation in support of the hypothesis that amniotic membranes may function to interrupt pathological fibrosis and restore tissue homeostasis. The practical implications of these findings are immense. The possibility of reduced scarring or information through the use of MiMedx proprietary technology could enable accelerated and improved quality of healing with decreased incidence of recurrence. This creates the potential for enhanced surgical outcomes from improved functionality to superior cosmetic results simply by incorporating MiMedx proprietary membranes into the procedure. We are already seeing the real-world benefits of such applications in a number of surgical applications. OB/GYNs for example are using our tissue to help promote healing during C-section closure. And there are numerous other use cases and Novel Applications starting to develop. Considering the potential benefits demonstrated in this study and applying that to the tens of millions of surgeries performed in the US annually, the size of the opportunity could be staggering for MiMedx. The importance of this type of research and other supporting investments in order to continue to demonstrate the superiority of our technology cannot be overstated. We have the company's strategic compass pointed squarely in the direction of a greater surgical presence. And we will continue to ramp up necessary clinical and marketing investments to support these opportunities. And of course, we're excited to move into full market release of HELIOGEN, our first xenograft particulate, which we will promote for use in surgical cases, where such products may be more appropriate for various reasons. We expect this first xenograft product to provide for greater access into parts of the markets we have historically been precluded from competing. Our third initiative is to introduce programs designed to enhance customer intimacy. As a reminder, the primary focus of this initiative is to develop programs, which improve relationships and ultimately 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 dynamic and build much stickier associations through an expanded customer-centric offering thereby increasing the lifetime value of each customer. The long-term plan is to embed a customer-centric mindset and processes in all facets of the organization from product development to inventory visibility and account management. As mentioned a few months ago, we recently launched MIMEDX Connect our new customer portal providing a far more streamlined digital connection with referring practices. The adoption rate is exceeding our expectations with nearly 25% of our active customers now using MIMEDX Connect to interface with the company for processes such as insurance verification and product ordering. We will continue to enhance the feature set platform and believe it will eventually become another distinct competitive advantage for the company. Now let me turn the call over to Doug for more detail on our financial results. Then I will close with comments about the private office reimbursement dynamic and full year guidance. Doug?
Doug Rice: Thank you, Joe and good afternoon to everyone on today's call. Thank you for joining us. I'm pleased to once again share our results with you all today. As a reminder, 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. Beginning this quarter in order to increase visibility, we added a few tables in the back of our press release that break out our non-GAAP adjustments by expense line item. I encourage you to review these materials alongside my comments today. Additionally, and as a reminder during the fourth quarter last year 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 second 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 late Q2 2023. For a full discussion of the impact of these discontinued operations, please refer to our most recent 10-K and 10-Q filings. Moving on to the results. Our second quarter 2024 net sales of $87 million, represented 7% growth compared to the prior year period. As Joe mentioned in his remarks, there were several factors that drove this performance in the quarter and I would like to provide some additional color on each of them. By product category, net sales growth was relatively balanced between our wound and surgical businesses, particularly when you consider certain anomalies. Second quarter wound sales of $58 million grew 8% versus the prior year period and second quarter surgical sales of $30 million grew 6% as reported and 13% excluding AXIOFILL and the sales of the dental product in the prior year period. Two of the standout contributors in the quarter were our AMNIOEFFECT and EPIEFFECT products which continue to gain traction in the surgical and wound markets respectively. Turning to our results by site of service. While we saw positive growth in all of our sites of service during the quarter as Joe mentioned we have seen a sizable increase in competitive behavior related to the sale of artificially high-priced products in the private office setting for Medicare beneficiaries. This has resulted in a deceleration in our growth rate compared to the first quarter of 2024 in each of these associated care settings. These competitive pressures resulted in higher-than-normal levels of employee and customer churn, beginning about midway through the second quarter. Additionally, the introduction of the proposed LCDs during the quarter prompted the beginning of some changes in behavior for portions of the private office site of service. But clearly as evidenced by the performance of artificially high-priced skin substitute, this continues to pose a challenge in the marketplace for us. Finally, as I mentioned earlier and to a lesser extent, our sales of AXIOFILL declined on a year-over-year and sequential basis. While we still have a number of loyal accounts routinely using and ordering this product, our ongoing matter with the FDA is having an impact on this product line's performance with certain customers. The AXIOFILL matter with the FDA remains on schedule and will likely drive toward a ruling from the court later this year or early next year. Taken together these items softened our otherwise strong momentum in many market sectors and regions. Our second quarter 2024 gross profit was about $72 million compared to $68 million last year. Our gross margin was 83%, down slightly compared to the prior year period due in part to incremental amortization expense from intangible assets acquired in the HELIOGEN transaction. Excluding this $400,000 impact, our gross margins were flat compared to the second quarter of 2023. Turning to our operating expenses. Selling, general and administrative expenses or SG&A was $55 million in the second quarter compared to $52 million in the prior year period. SG&A was 64% of our net sales in both periods. The increase in SG&A was related primarily to a variety of higher commercial expenses including commissions, costs associated with the HELIOGEN launch, and increased other costs including legal fees in the quarter compared to the prior year period offset by spending efficiencies in other areas. Our second quarter R&D expenses were $3 million or about 3% of net sales compared to $4 million or about 5% of net sales in the prior year period. With our EPIEFFECT RCT underway, 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. Income tax expense for Q2 2024 was $6 million, reflecting an effective tax rate of 24%. This is roughly in line with our 25% long-term non-GAAP expected effective tax rate that we utilize going forward. Our second quarter GAAP net income inclusive of the results of our discontinued operations was $18 million compared to $1 million in the prior year period. Our GAAP net income for the second quarter was driven in large part by benefits we recorded associated with the resolutions of matters involving former officers. Adjusted net income for the quarter was $11 million or $0.08 per share compared to $6 million or $0.03 per share in the prior year period. Second quarter 2024 adjusted EBITDA was $20 million or 23% of net sales compared to an adjusted EBITDA of $14 million or about 17% of net sales in the prior year period. Turning to our liquidity. The strong free cash flow generated by our business reached its highest level in the history of the company during the second quarter at $22 million, nearly the entire amount of free cash flow we generated in all of 2023. This enabled us to grow our net cash balance to $50 million by the end of the second quarter, marking yet another significant improvement in our balance sheet as we work to strengthen our position in order to have the optionality to make investments in a number of different ways that we believe will unlock shareholder value. I will now turn the call back to Joe. Joe?
Joe Capper: Thanks, Doug. As you have just heard, we had another solid quarter. Net sales were $87 million or 7% in the quarter. Gross profit was 83%. Adjusted EBITDA was $20 million or 23% of net sales in the quarter. We ended with $69 million in cash. We began a limited market release of HELIOGEN, our first xenograft product, and we were excited to see the Nature publication and it’s foreshadowing of the vast potential for future applications of our allografts. Now let's return to a discussion of the reimbursement situation in the private office. On my very first MiMedx earnings call, a year and half ago, we provided commentary on challenges we were facing in the private office and adjacent care settings due to what we described at the time as certain participants using loopholes in the Medicare reimbursement system in order to provide sizable financial incentives to physicians for using their products. Since that time, the situation has gotten dramatically worse as a result of new and intricate schemes designed with the express purpose of self-enrichment by massively overbilling CMS for products with sparse supporting clinical data. Frankly, I'm shocked this has been allowed to persist for so long but remain optimistic it will be addressed in the very near future. To put this crisis in perspective CMS payments for skin substitutes increased by over 260% or $2.5 billion in a single year from approximately $1.5 billion in 2022 to $4 billion in 2023. In recent months the situation has reached a frenzied state causing tremendous disruption and dislocation in the market and MiMedx is not immune. While we have been fairly successful at holding this pressure at bay the impact from what we consider improper business practices has been metastasizing. As a result, we have experienced above-average employee and customer attrition, as people leave in pursuit of what could be fool's gold. The abuse of practices in the skin substitute market have caught the attention of the Department of Justice, which last month announced a massive case involving the criminal prosecution of several individuals who were allegedly running a scam to overbill Medicare for skin substitutes. The problem has gotten too big to ignore and needs to be addressed. While we applaud the enforcement action to round up bad actors we are in desperate need of action on the payer front to close the barn door. Just prior to our call a few months ago all seven of the Medicare Administrative Contractors or MACs published proposed Local Coverage Determinations or LCDs in unison which would in effect create a national coverage policy. As a reminder the proposed LCDs call for a utilization cap of four skin substitute applications per case with an allowance for additional applications based on medical necessity in instances when a patient's wound needs more help achieving closure. The proposed LCDs would also limit the number of products approved for reimbursement at 15 based on published nonbiased clinical evidence and would prohibit reimbursement for over 180 other products. Two of our three products offered in the private office, including our flagship EpiFix product are among the 15 approved for reimbursement. The third EPIEFFECT is not on the list due to a lack of sufficient published evidence. However, we now have a highly-powered randomized controlled trial underway for EPIEFFECT, which should lead to coverage in the future. The industry appears to be appropriately moving towards a requirement to produce clinical evidence to prove efficacy as products come to market. Given our long-term commitment to evidence-based medicine this plays to MiMedx's strength. It was a comment period which ended June 8. In addition to providing comments to the MACs we've made recommendations directly to CMS and other stakeholders. We are now awaiting word from the MACs on their plans for implementation of the LCDs. A few weeks ago CMS published the proposed 2025 physician fee schedule which does not include proposed changes to the pricing methodology for skin substitutes. That being the case implementation of the LCDs in a format similar to what has been proposed is the most likely near-term mechanism for Medicare to rein in this runaway spend. This will cause some level of disruption in the market at least in the short term. However given the balance of our product portfolio our commitment to evidence-based medicine and our much improved financial profile I believe we are well positioned to navigate the changes and expect us to benefit in the end under a more rational reimbursement structure. In terms of guidance we think the prudent thing to do at this point is to update our full year revenue growth guidance bringing it from the low double digits to the mid to high single digits. To reiterate, while less than 25% of our business is in the effective care settings. Our second half overall performance will be impacted by whether or not the MACs implement the proposed LCDs. Again, we see the implementation as a net positive for MiMedx but until CMS provides some clarity on the path forward we have to plan for continued disruption. Obviously, we will revisit expectations as we learn more. I want to stress that this fine-tuning is specifically linked to this very acute reimbursement issue with the private office and adjacent settings and in no way diminishes our excitement about the long-term prospects for the business and specifically, our ability to grow the top line in the low double digits with a strong adjusted EBITDA profile above 20%, once we have cleared this challenge. Importantly, the 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 and leverage the science supporting the superiority of our technology as demonstrated in the Nature publication. In closing, I would like to congratulate and thank the entire MiMedx team for delivering another solid quarter. I am confident we will navigate the current challenges we discussed and continue to stay focused on helping to improve the lives of the many people who are treated with our growing portfolio of products. With that I would like to open the call to questions. Operator, we are now ready for our first question. Please proceed.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ross Osborn with Cantor Fitzgerald. Please proceed with your question.
Ross Osborn: Hi guys. Thanks for taking our question. So starting off would be curious to hear, if you think you've seen the worst of the attrition of customers and sales force due to highpriced products. And then going off of this, how should we think about revenue cadence for the balance of the year to get to your mid to high single-digit guidance?
Joe Capper: Yeah. I do think we've seen the worst of it. We had kind of a bolus of activity in the second half of the second quarter like I mentioned in my commentary higher-than-normal customer churn and employee turnover. So we moved pretty rapidly to kind of limit the damage there rebuild in the areas that were most affected. Frankly, it was concentrated in a handful of areas which made it a little bit more difficult to cover with adjacent folks. So we've worked through that. We think we're in pretty good shape now and expect that the worst of it is behind us. But that being said, there's still an awful lot of activity around the sales of these as we refer to as artificially high-priced products. So we're going to battle through it. The best thing that could happen is that the government takes some sort of remedial action as soon as humanly possible. We had hoped to see it in the physician fee schedule which was proposed a few weeks ago. We did not. So the next best thing that could happen is for the MACs to implement the proposed LCDs in their current or some similar format. Again, this would curtail most of the behavior because those super high-priced products are not on the approved list. But we have to plan for the worst. That being the case we felt it was prudent to take guidance down to the mid- to high single digits with potential upside that the LCDs are implemented. We plan for no upside in that guidance with LCD implementation because we can't predict when that will happen. But we thought it was the most prudent thing to do. And that assumes kind of a similar run rate in sales to what we're seeing right about now.
Doug Rice: Yeah. Ross, I'd also just add that sort of our back half guidance certainly anticipate continued momentum behind our recent launch of our xenograft HELIOGEN. EPIEFFECT is off to a good start this year and certainly gaining traction with AMNIOEFFECT and our surgical suite. And our international business continues to grow. But the vast majority of the turbulence we think will happen as Joe indicated because a lot of this happened in the second half of the second quarter. From a cadence perspective, I'd expect that continue to play out as we recover. And we've already filled almost all the gaps at this point for Q3. And we've also got some traditional health care seasonality playing out in Q3. So I'd say Q3 as being more impacted than Q4.
Ross Osborn: Okay, got it. That's very helpful. And then lastly for us before I jump back in queue. Could we spend a little bit more time on the RCT for EPIEFFECT just in terms of the size, time line and cost assumptions there?
Joe Capper: Yeah, we did not put out the size in terms of number of patients. I would just refer to it as a highly-powered well-designed RCT. It's already been through IRB, so the study is underway. We're at the outset of patient enrollment. We think, time line I think we had talked about probably around a year with interim report out in like the six-month time frame. And I don't think we've put out a number on it. But well within our budget and we'll forecast. So it will have a huge impact on our R&D spend as a percent of revenue.
Ross Osborn: Got it. Thanks for taking the questions.
Doug Rice: Thanks for initiating coverage, Ross. We appreciate our relationship with Cantor.
Ross Osborn: Likewise. Thanks.
Operator: Our next question comes from Chase Knickerbocker with Craig-Hallum Capital Group. Please proceed with your question.
Chase Knickerbocker: Good afternoon guys. Just first, help me understand a little bit here Joe what was different in Q2, and going forward relative to Q1 and last year? Obviously there's been these high ASP products in the market. Maybe speak to what happened kind of specifically in the second half of Q2 that was driving additional churn of customers and sales reps in this quarter relative to others. Was there new strategy from some of these players or just speak to exactly what was different? Thanks.
Joe Capper: I think it's just more of a chase. You've been following us for a while now. We've been talking about this is an issue for a couple of years. Originally we were lobbying to have people -- other participants be required to report their ASP so that everyone's “playing on the even playing field”. Folks were using you may recall WACC in invoice pricing and not reporting rebates so that was causing a lot of issues. And then quickly people started to migrate to the ASP prices. We saw this huge spike up of the number of products on that list. Then we saw companies start to price these things at dramatically high level 10 times what the normal price levels were and using a scheme to rotate multiple products in and out of the market in order to keep that price at those high levels. So I think what's happened is a couple of things. One, there's just more and more people get into the game and there's a lot more product in the market. There's a lot of people making a fortune by doing this. It kind of makes my stomach a little ill when I think about it, because what they're doing is using these schemes to overbill Medicare at this artificially high prices, which hurts the trust of taxpayers and most of all some of those vulnerable members of our society, elderly people who are dealing with chronic wounds. So it's unfortunate. But I think to your point it's accelerated. We did a pretty good job keeping it at bay for a while. We've been lobbying the government to make change and have had no success. So frankly we're probably losing a little credibility in that argument, telling people that this is wrong and shouldn't be doing it. It's tough when everybody else is doing it and you see your friends making a bunch of money. And then doctors are telling you how rich they're getting. So it was -- it's a hot mess and it needs to be addressed.
Chase Knickerbocker: Do you think there's any dynamic that now that these LCDs are out there and slated to potentially go into effect that there's a little bit of some spurring of usage because some of these loopholes might be closed in the fairly near term?
Joe Capper: I would love to see it. I think the fact that the LCDs are looming and we should hear something at any day or any day is helpful. The fact that the Department of Justice is now put a spotlight on it, they're starting to be -- some media coverage is picking up on it. We're lobbying with CMS. We're talking to the MACs. We're talking to lawmakers. We're talking to media. So people are starting to see this for what it is. It's a pretty elaborate scam. And when you look at if you saw the chart from our presentation look at the slope. When you go from like what $500 million or less than $500 million in 2020 to over $4 billion in 2023 there's no other product category that does that. This wasn't the introduction of a new life-saving drug. They’re just using fairly mature products to overbill the government. That's what this is all about. It's a very elaborate scheme to overbill the government and as I indicated some critical some vulnerable members of our society. So it has to change, right? You would think that this is going to get shut down. That being said the people that we're talking to have to work through a process. There has to be a publication of proposed rule changes. There has to be comment periods et cetera, et cetera. So they're working through the process which unfortunately takes time. Yes, it's great that the DOJ is going after people that are really abusing it. But that's -- they still need to close the front end of this problem.
Doug Rice: And Chase I would say don't forget that this is one side of service and one payer that we're having this turbulence in. So I would expect that to normalize over time but we believe that generally it's less than 25% of our total top-line. The remainder of the business remains strong and healthy with a lot of growth drivers.
Chase Knickerbocker: Understood. And then just last two from us. If we think about that LCD whenever it does potentially go into effect right. If we think about that first quarter for you guys do you see that as being positive to the trajectory of revenue again in that first quarter that goes into effect even despite having some -- the revenue from EPIEFFECT likely rolling out of the model in that quarter? So again just that quarter having a positive effect, the LCD have a positive effect on revenue that quarter. And then second for Doug just on EBITDA. Do we still expect kind of 20% margins or how should we be thinking about EBITDA through the remainder of the year? Thanks.
Joe Capper: Yes. I would expect an uptick in the business soon after these things are implemented. I don't think there is a lot of inventory burnoff when the inventory is priced at $2,000 per square centimeter. I just don't think people are carrying a lot of it. So my guess is we'll probably see the market shift pretty quickly. Doug?
Doug Rice: Yes. From just an adjusted EBITDA perspective we didn't guide but the way I think about the back half of the year is we're certainly built to grow we're built to scale and we believe that a lot of the turbulence today is transient. And we'll certainly recover and we want to maintain the good infrastructure that we already have. But I would expect that while we had about 22% EBITDA in the first half of the year we've guided previously that we thought would be north of 20%. I think we'll approach 20%. I think we'll be modestly below 20% for the back half of the year. And I would look at that as sort of gross margin in the low-80s at this point as we have less volume in this particular side of service to cover our fixed costs. And I think the other big driver here is that as the EPIEFFECT RCT ramps up that we would expect R&D to be closer to mid single-digits at that point instead of the 3% or so that they run in the first half of the year.
Joe Capper: Chase, it's Joe. Listen I know we're talking a lot about LCDs and I'm sure the rest of the questions we're going to get are going to revolve around this as well because of the nature of the issue. And as you indicated it's been going on for a while. This is really the first quarter that we've talked about it this much and that we've been impacted by it. We do see it as transitory. We don't think it impacts the business long term. It's a nuisance that we have to deal with. However, as difficult as it is to deal with we still recorded $87 million of revenue in the quarter which is tied for the highest quarter we've ever had and we're still generating a lot of cash and a lot of adjusted EBITDA. So we will get through this. As you heard me indicate in the past that once we're on the other side of this reimbursement issue and once we get more stability from a regulatory standpoint we fix regulatory and reimbursement in this industry it's a lot more investable. And I think in the long run this will all play out and we'll look back and laugh about it at some point.
Chase Knickerbocker: Got it. Thanks for taking questions.
Joe Capper: Thanks, Chris.
Operator: Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.
Brooks O'Neil: Thank you very much. Joe as you said a lot of questions a lot of comment on LCDs so following that I've got one more. I'm just curious. Obviously, last year significantly disrupted by proposals from some of the MACs that were subsequently withdrawn. Then they come out with a uniform LCD across seven MACs this year. The one thing I don't think I've heard you guys comment about is do you get any indication from these MACs following the comment period, during the comment period whether they are determined to right this wrong in the reimbursement loophole situation? Or do you think we could see additional wobbling on this topic at this time?
Joe Capper: It's a good question, Brooks. And I would say that they're fairly close to the best in terms of giving any sort of implication, whether or not they're going to implement and when they would be implemented. So I can't handicap this for you. I wish I could. I would tell you though that in my meetings with the folks that we've been able to talk to we've had several they're highly sensitive to what's going on, highly sensitive and asking a lot of questions and asking for follow-up calls. So they're doing the work on it, which tells me and again if I apply some level of logic given the escalation of the spend, which tells me some action will be taken in some format soon. But look if I had a crystal ball, I'd have the answer for you buddy.
Brooks O'Neil: Right. I hear you. Totally understand. All right let me just ask you one more different question and that is can you give us a sense for the timing of the full rollout of the xenograft product? And I think I heard you use a word that suggested you think the market is big, potentially big. And can you give us any sense for in dollar terms or whatever -- how big you think it is for you guys? And sort of whether you think you can begin to really see meaningful incremental revenue yet this year? Is it more a 2025 event? Is it more a '26 event as you look out into your crystal ball? Thanks a lot.
Joe Capper: Yes. Really excited to get this first one out into the marketplace. And as a reminder this is a collagen-based particulate. So it's going to be used in certain surgical procedures tendon repair, et cetera. So we do think that there's a good application for this product. We plan to launch other products in the xenograft category as well. And as a reminder that just opens up a lot more market opportunity for us. Amniotic tissue only accounts for about 45% in that neighborhood of the total skin submarket with xenograft and synthetics covering the remainder. So big market opportunity for us to probably at least doubling our TAM. These are areas in a market that we have been precluded from competing in for a variety of different reasons. Sometimes it's cost sometimes it's other reasons. People don't want to use amniotic tissue. But I think it's a pretty good size market opportunity for us. We'll see some upside from the product this year but really start to ramp up next year.
Brooks O'Neil: Great. Thank you very much. Good luck with the bad guys.
Joe Capper: Thanks Bruce.
Operator: Our next question comes from Anthony Petrone with Mizuho Group. Please proceed with your question.
Anthony Petrone: Thank you. And hope everyone is doing well. First one just to follow-up on xenograft. Thanks for that detail there. Competing today in 45% of the market xenograft gets you in the remaining 55%. How many products do you need to sort of address that sort of large market opportunity? You have an initial product in. How many more xenograft products do you expect to add? And then just a quick follow-up on LCD. When we sort of revert back to some of the data that was out there in terms of the overall billing into Medicare it was over $1 billion. The expectation is that some of that's going to go away some of that's going to stay. But at this juncture as this process is sort of evolving here and being extended ultimately, what do you think that opportunity is going to be in the US Physician Office once this settles out and we have a definitive path forward from the MACs? Thanks, again.
Joe Capper: So let me get back to xeno first. So yes, we need to round out that product portfolio. I want to think of it in terms of similar to what we're doing now in amniotic tissue. We'll have sheets of different sizes and different thickness accelerated use in different procedures, sometimes with a strong potential strength that you can use in more complex surgeries a product that can be sutured et cetera. So I would say -- I can't give you a number whether it's 2, 3, 4, 6, but we're going to have a variety of SKUs that meet the needs of the marketplace so that we can compete at all levels. The question about LCD market opportunity, how much of it is overutilization? How much of the price? Again, if you look at the -- one of the slides we had in the presentation, you can see that the line portion of that is utilization. So there's massive overutilization as a result of the opportunity to make these incredible amounts of money. So I think utilization is cut way back once this is shut down and cleaned up. And obviously pricing goes back in line. And we've done a lot of sort of sensitivity analysis around us once this market is rightsized. How much of it we would have an opportunity to compete for given our current share of amniotic tissue in some of the care settings and then looking at as patients migrate from one care setting to another, it's going to be a sizable opportunity for us Anthony. I don't want to give -- put a number out there, but it will be a pretty decent sized opportunity for us.
Anthony Petrone: Thank you, so much.
Operator: Our next question comes from Carl Byrnes with Northland Capital Markets. Please proceed with your question.
Carl Byrnes: Thanks for the questions. Most of my questions have been answered. Do you have any feel or expectations with respect to potential time line of events that might lead the seven MACs to adopt the LCD? Thanks.
Joe Capper: No, I wish I did, Carl. Thanks for the question. We talked a little bit about that already. When we asked the question, the answer we get is, we're working through the process. We're working through the process. I would just go back and stress the fact that unlike this time last year, there is a much more heightened sensitivity at least from our perspective of various stakeholders who are involved in setting these rules. In our conversations, people are very in tuned to what's going on. And obviously that means they're getting asked about questions as well. So I think this has been elevated to a fairly high level in the various government agencies that have responsibility to either price or implement coverage determinations on these products. But it can't go on for all. Who knew that you didn't need a gun to rub it back? All you needed was a skin substitute.
Carl Byrnes: Thanks so much.
Operator: There are no further questions at this time. I would now like to turn the floor back over to Joe Capper for closing comments.
Joe Capper: I appreciate it. Thanks everybody. Appreciate your questions and your participation. Thanks for your continued interest in the company and we will talk to you next quarter.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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