MiMedx Group, Inc. (MDXG) Earnings Call Transcript

Greetings, and welcome to the MiMedx Third Quarter 2026 Operating and Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Matt Notarianni, Head of Investor Relations. Thank you, Matt. You may begin.

Thank you, operator, and good afternoon, everyone. We are pleased to welcome you to MiMedx's third quarter 2026 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 today with a summary of our third quarter 2026 operating and financial highlights, and Doug will provide a detailed review of our results for the quarter. And then we will conclude with some additional updates before we open the line 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, operating results and cash balance growth, future margins and expenses, our product portfolios, expected market sizes for our products and expectations regarding the Sanara acquisition, including expected benefits and financial performance of the combined company. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors, including competition, access to customers, the reimbursement environment and unforeseen circumstances and delays. 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. Also, our comments today include non-GAAP financial measures, and we provide a reconciliation to the most comparable GAAP measures in our press release, which is available on our website at mimedx.com. Furthermore, all our statements are as of today, October 28, 2026, and we have no obligation to update any forward-looking statement we make. With that, I'm now pleased to turn the call over to Joe Capper. Joe?

Thanks, Matt, and good afternoon, everyone. Thank you for joining us on today's call. The results and trends of the third quarter reinforce the strategic rationale for the direction we are taking the company. Our Surgical business performed well despite somewhat softer procedure volumes, a trend that has been reported across the industry, while our Wound Care business continues to work through the reset precipitated by the changes to Medicare reimbursement. Additionally, we made significant progress preparing for the acquisition and subsequent integration of Sanara MedTech. However, as previously announced, the FTC has issued a second request for information, which extends the Hart-Scott-Rodino waiting period. We will work diligently with the commission to satisfy its inquiry, and we remain fully committed to the acquisition. We believe the combination of the 2 companies will enhance our ability to serve the marketplace and benefit patients. By combining Sanara with our Surgical franchise, which delivered mid-teens volume growth in Q3, we will create a more compelling regenerative medicine business and accelerate the shift of our business mix towards the Surgical market. In Wound Care, although we grew volume in targeted sites of care, the market continues to work through a range of issues resulting from the 2026 Medicare reimbursement changes. Third quarter market trends were very similar to those we reported in the first half of the year, continued disruption, pricing pressure, lower overall market volume and a gradual migration of patients into Wound Care Centers, where we achieved 7% sequential growth. Once the Wound Care market establishes a stable and predictable foundation, we believe our commitment to generating clinical evidence and to technology innovation will drive our long-term competitive advantage. Regarding the Sanara acquisition, I would like to reiterate several key points from last quarter's call. This transaction is consistent with our well-established strategy to expand our Surgical portfolio. All of Sanara's more than $100 million in revenue is generated from Surgical procedures that are highly complementary to our business. Following the merger, approximately 75% of MiMedx's revenue will come from Surgical and 25% from Wound Care. We believe this is an exceptionally strong strategic and cultural fit. Sanara is a growth company that is profitable and immediately accretive even before synergies. Sanara's products are 510(k) cleared and open up $4 billion in addressable markets in which we do not currently compete. We would expect the combined company to generate run rate revenue of close to $400 million with double-digit growth. With more than $20 million in expected cost synergies, we would anticipate reaching an annual adjusted EBITDA margin of more than 20%. Taken together, these attributes illustrate why we view this as a highly beneficial combination for MiMedx and the people we serve. Turning to the highlights of the quarter and additional details on our 2 businesses. The headline for Q3 is similar to that of last quarter. We continue to see solid growth dynamics in Surgical and a gradual recovery in Wound Care with a few notable bright spots. For the third quarter, net sales were $62 million. Surgical revenue increased 9% year-over-year with volume up in the mid-teens. Wound Care Center unit volume grew 7% sequentially, a positive indicator for the business going forward. GAAP gross profit was 80% in the quarter, a sequential improvement of 11 percentage points. Adjusted EBITDA was $2 million, a $10 million sequential improvement. We received a significant ruling in our favor from a U.S. District Court in our challenge to the FDA's regulatory classification of AXIOFILL. As announced today, we reached a $25 million settlement and licensing agreement with one of several parties that we believe infringed on our patent portfolio. This party elected to settle rather than litigate. We continue to litigate 2 other potentially larger cases. And we made substantial progress on our 510(k) submissions for 2 new Surgical products, including one for placental-derived product. As you know, our strategic priorities have been: number one, innovation and diversification to support both our Wound Care and Surgical businesses; and number two, targeted investments to expand our Surgical franchise. This strategy has been highly effective. As a result, we have continued to deliver excellent growth in our Surgical segment while navigating the industry dynamics affecting the Wound Care market. Again, we believe the Sanara acquisition will play an important role in advancing our portfolio reshaping strategy. Moving to our Q3 Surgical performance in more detail. As mentioned, Surgical net revenue grew 9% year-over-year. A closer look shows that a few discrete items in the quarter dampened an otherwise strong underlying growth rate. Specifically, Q3 2025 Surgical revenue included close to $1 million of opportunistic business-to-business placental tissue sales driven by outsized market demand. Following the significant shift in the market, demand for these third-party sales did not recur and no such revenue was recorded in this year's quarter. Additionally, rebate adjustments increased as a result of short-term promotional activity. Excluding these items, our Surgical growth rate would have been in the mid-teens. We continue to see growth across our entire Surgical product portfolio with accelerating demand for our human placental and bovine-derived particulates as physicians expand their use across a variety of procedures. To that end, we were pleased that the U.S. District Court of the Northern District of Georgia issued a favorable ruling in our litigation challenging the FDA's regulatory classification of AXIOFILL, our human placental-derived particulate. The court vacated the FDA's determination that AXIOFILL is not a Section 361 product and should instead be classified as a biologic product rather than a medical device. The court remanded the matter to the FDA for further consideration. The ruling stated that the FDA had erred in its interpretation of the minimal manipulation regulation and that the agency did not adequately explain the reason behind its divergent classification of AXIOFILL compared with similar products available in the market. Since its launch in 2022, AXIOFILL has demonstrated a strong safety profile and has supported many patients through the surgical healing process. We hope this ruling addresses any lingering concerns in the market regarding the use of this product. During the third quarter, the Wound Care market continued to work through the aftermath of the new Medicare reimbursement framework, a process that is proceeding more slowly than we had anticipated. That said, the expected migration of patients into Wound Care Centers where we are well positioned competitively continued during the quarter. Our Wound Care Center volume grew more than 20% year-over-year and 7% sequentially. Utilization of skin substitutes in other outpatient sites of care remains well below prior year levels due to the disruptions we described on previous calls. We remain confident that our position in the Wound Care market will benefit us over time. We are also beginning to see early traction with our PRP offering. While the proposed 2027 Medicare fee schedule did not include any meaningful changes for skin substitutes, we remain optimistic that CMS will ultimately establish baseline requirements for evidence of product safety and efficacy as a condition of reimbursement. Accordingly, we continue to fund randomized controlled trials on 2 of our most recent product introductions and expect publications in the near future. It remains to be seen whether any changes will be included in the final rules when they are published in the coming weeks. As I mentioned on our last call, we submitted our first 2 510(k) applications for Surgical products. In recent months, we made substantial progress on both submissions and now anticipate at least one clearance before year-end. In summary, we rightsized our cost structure to support a return to positive adjusted EBITDA and cash flow, which we achieved in Q3. Momentum in our Surgical business remains strong, and we are making good progress as the Wound Care market works through this reset phase. Once the market normalizes, we believe our market-leading technology supported by an unmatched body of clinical evidence will set the standard. Speaking of our technology, as I mentioned, we recently entered into a $25 million out-of-court settlement and license agreement with a party we had asserted had infringed on our patents. We have 2 other active cases currently in litigation. Both cases have completed claim construction hearings with rulings that were highly favorable to our arguments. Additionally, a recent attempt by one of those defendants to invalidate our patents through an ex parte reexamination at the U.S. Patent and Trademark Office was unsuccessful, and the PTO once again affirmed the validity of the patents we are asserting. We will continue to vigorously protect our patent portfolio. With that, I'll turn the call over to Doug. Doug?

Thank you, Joe, and good afternoon, everyone. We are excited about our pending acquisition of Sanara MedTech and the opportunities it creates for our combined organization. That said, my comments on our third quarter performance and our outlook for the remainder of 2026 are on a stand-alone organic basis and exclude any potential impact from the pending Sanara acquisition. As a reminder, many of the financial measures covered in today's call are presented on a non-GAAP basis. So please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures, including the reconciliation tables that provide more detail regarding the adjustments made to calculate our non-GAAP measures. Turning to our results. Third quarter 2026 net sales were $62 million, down 45% from the prior year period. By product category, Surgical net sales of $40 million grew 9% year-over-year and 2% sequentially during the third quarter. Notably, our Surgical franchise now accounts for approximately 2/3 of our total net sales. And as Joe mentioned, Surgical product volume growth was up in the mid-teens as a percentage year-over-year. Within Surgical, growth remained broad-based across the portfolio. Our flagship placental sheet products, AMNIOFIX and AMNIOEFFECT and our particulate products all generated strong year-over-year growth. We also benefited from contributions from our recently launched G4Derm Plus product, further demonstrating the breadth of our Surgical portfolio and our ability to drive growth through continued product innovation. Wound net sales were $22 million, down 71% from the prior year period. Within Wound, the business continues to be impacted by the Medicare reimbursement changes that took effect on January 1, 2026, which has had the effect of not only reducing reimbursement levels, but also volumes across the industry. Many of the pressures we discussed on our second quarter call persisted through Q3. That said, we are encouraged by the improving activity in Wound Care Centers and hospital outpatient settings as patients continue to migrate to those sites of care. Our Wound Care Center volume grew more than 20% year-over-year and 7% sequentially, a sign of stabilization. As we have seen all year, strong Surgical performance partially offset reimbursement-related pressure in Wound. To finish the year, we expect high single-digit year-over-year growth in Surgical and mid-single-digit sequential growth in Wound. Gross profit was $50 million compared to $95 million in the prior year period, and gross margin was 80% compared to 84%. The decline was primarily driven by lower pricing within Wound following the Medicare reimbursement changes and unfavorable product mix. Importantly, I want to highlight the significant sequential improvement in our gross margin compared to the second quarter. Our third quarter gross margin was higher than our second quarter gross margin by approximately 11 percentage points, driven by lower production costs associated with our cost reduction initiatives, improved manufacturing throughput and ongoing operational efficiencies. We expect fourth quarter gross margin to approximate the Q3 level as we continue to benefit from our cost reduction initiatives and improved throughput. Sales and marketing expense was $40 million or 64% of net sales compared to $54 million or 47% of net sales in the prior year period. The dollar decrease was primarily driven by our cost reduction initiatives, which resulted in lower compensation, travel and meeting expenses. We also benefited from lower commission expense, reflecting reduced sales volumes within Wound and year-over-year improvement in bad debt expense. For the fourth quarter, we expect sales and marketing expense of 58% to 60% of net sales, reflecting the continued benefit from our cost reduction initiatives alongside our anticipated sequential increase in net sales. GAAP general and administrative expense was $19 million compared to $15 million in the prior year period. The increase was driven by $6 million of incremental legal expenses associated with our ongoing litigation matters as well as strategic and other transaction costs related to Sanara. These costs were partially offset by lower compensation expense resulting from our cost reduction initiatives. For the fourth quarter, we expect GAAP G&A expense of approximately $18 million to $19 million, consistent with Q3. Research and development expense was $3 million or 4% of net sales, down 25% from the prior year period, primarily due to lower personnel costs following our cost reductions. We expect fourth quarter R&D expense of approximately $3 million to $3.5 million, consistent with Q3. Our effective tax rate was 22% compared to 27% in the prior year period, reflecting certain permanent tax adjustments and deduction limitations. We continue to expect our long-term non-GAAP effective tax rate to be approximately 25%. GAAP net loss was $9 million or $0.06 per share compared to GAAP income of $17 million or $0.11 per share in the prior year period. Adjusted net loss for the third quarter was $1 million or $0.01 per share compared to adjusted net income of $23 million or $0.15 per share in the prior year period. The year-over-year decline primarily reflects the impact of lower profitability within the Wound segment, partially offset by savings realized through our cost reduction initiatives. Adjusted EBITDA was $2 million or 3% of net sales compared to $35 million or 31% of net sales in the prior year period. Sequentially, our lower cost base drove a return to positive adjusted EBITDA, a favorable swing of approximately $10 million from Q2. We remain focused on executing our operating plan and expect adjusted EBITDA to improve sequentially in the fourth quarter as we continue to realize cost savings and drive improved operating leverage. Turning to liquidity. We ended the quarter with $121 million in net cash, essentially flat year-over-year and up $2 million sequentially. During the quarter, we repaid the remaining $17 million principal balance under our Citizens Term Loan. We ended the quarter with no borrowings outstanding under our term loan or revolving credit facilities. This debt-free position and our cash balance give us significant financial flexibility as we prepare to close the Sanara acquisition. Turning to our pending acquisition of Sanara. As previously mentioned, we have secured a commitment from Hayfin Capital for a 6-year $300 million first lien senior secured term loan initially bearing interest at term SOFR plus 6.25%. The commitment is contingent upon the successful closing of the acquisition, at which time the facility would be funded. Together with cash on hand, the proceeds are expected to fund the cash portion of the transaction consideration. In light of the recent FTC news and the corresponding delay in closing the acquisition, we have started to incur a modest ticking fee associated with Hayfin's commitment, which will come due at closing when the transaction is funded. As Joe mentioned earlier, we expect the combined company to generate run rate revenue close to $400 million in its first full year. Coupled with at least $20 million of identified annualized cost synergies, we also expect the first year of the combined company to deliver an adjusted EBITDA margin of at least 20%, along with strong free cash flow and a disciplined capital structure. The earnings and cash flow profile is expected to support rapid deleveraging with net leverage anticipated to fall below 3x by the end of the first full year after closing. Turning to guidance. We are updating our stand-alone 2026 outlook and now expect full year net sales of $250 million to $260 million. We also expect modest sequential growth of adjusted EBITDA in the fourth quarter. I will now turn the call back to Joe. Joe?

Thanks, Doug. As you have just heard, our Surgical business continues to deliver solid double-digit volume growth. The Wound Care business is still adjusting to the new reimbursement environment. But given our strong presence in Wound Care Centers, we are well positioned to benefit as the market recovers. After rightsizing our cost structure, we recorded positive adjusted EBITDA for the first time this year, and we are working diligently to satisfy the FTC's request for additional information. In closing, I would like to once again thank and recognize the entire MiMedx team for the important work you do to positively impact the lives of the many people we serve and for the progress you have made in advancing the company's strategic shift toward a greater Surgical focus, which will better position us to serve the market and maximize the company's potential. With that, we will now open the call to questions. Operator, please proceed with the first question.

[Operator Instructions] Our first question comes from the line of Frank Takkinen with Lake Street Capital Markets.

I wanted to start with one on maybe some of the Surgical commentary, Joe. I heard the comment that there was the challenging comp with that reorder occurring. But I wanted to ask a little bit more specifically on the rebate side. Maybe talk a little bit on what led to offering the rebates? And then how should we think about kind of rebate activity on a go-forward basis?

Yes. It was some activity in the third quarter that was related to kind of new promotional work that we're doing short term through year-end and also a couple of accounts that we had active programs with that previously didn't look like they would hit targets, and now it looks like they're going to hit targets. So there might have been a little bit of catch-up in there as well. But if you look at it in the period, it was higher than what we typically record.

Got it. Okay. That makes sense. And then I know it's a sensitive topic, and I don't think I missed it, but any thoughts on maybe an update related to the time line on when Sanara could close and any additional thoughts you might be comfortable sharing with the process with the FTC?

I don't know that there's more detail I can share with you, Frank. It's -- we got a second request, so that triggers more inquiry. We're working through that. I would say that the interaction with the FTC has been very positive. So we think and we're optimistic that we can move through this in an efficient manner. I can't comment necessarily on what the areas of further inquiry are about. But I do think we're in good shape, and I remain pretty optimistic about working through this as efficiently as possible. And we are still very committed to the acquisition. And for all the reasons we outlined on the last call and this call, we think it's a really good fit for us. It will be accretive right out of the gate, and it fits squarely into what our strategic intent has been for the last 3-plus years. So not a whole lot of new color I can provide, unfortunately. As we learn more, we'll certainly share that with you. And I certainly don't want to put a time line on it because it's outside of my control.

Right. All right. Okay. Fair. Maybe just one last one for Doug. I heard the comments about 80% gross margin staying durable through Q4. Is it fair to think that, that profile can kind of stay durable on the go-forward basis into 2027 and beyond? Or how might we think about gross margin on a longer-term time frame?

Yes. Our ops team has done an outstanding job following our cost reduction activity in the spring. We've gotten a ton of manufacturing efficiencies, improved throughput. Going forward, I think a lot of it is going to depend on product mix, but we certainly like where we think we're going to exit the year.

Our next question comes from the line of Chase Knickerbocker with Craig-Hallum Capital Group.

Joe, maybe just on your Wound business strategically, a little bit higher level. I mean, do you feel like you have any better visibility to where this business stabilizes now versus last time we got an update in August? You noted expectations here for sequential growth in Q4. Any thoughts there that are a little bit more forward-looking on this business potentially stabilizing and when would be helpful.

Yes. This is probably the toughest one to predict, Chase. We're only 3 quarters into this reset. Just as a reminder, we came into this year having just realized we're losing probably 42% of our 2025 revenue, all at a high gross margin. So if you look at it on a gross margin perspective, we probably lost $145 million of 2025 revenue and we had to work through that, while the industry itself was resetting. With all the conditions that we've talked about on this call and prior calls, there's still a lot of noise out there. We do think we're in a good strong relative position, especially in Wound Care Centers where our message tends to resonate more. But what the thing -- where it finally settles out and stabilizes from a volume and price perspective is still a little difficult to pinpoint. And then what kind of growth rate we will realize on top of that once we sort of baseline the industry. So I know it's tough to model. It's tough for us to model. I would just say that when it settles down, we do think we're in a very strong relative position. I think it's companies like us that will ultimately be there when all the dust settles.