MDXG (2024 - Q1)

Good afternoon, and thank you for standing by. Welcome to the MiMedx First Quarter 2024 Operating and Financial Results Conference Call. [Operator Instructions]. 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. Matthew

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.mimedx.com. With that, I'm now pleased to turn the call over to Joe Capper. 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 MedTech 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 healthcare 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 advisers 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 TELA Bio, established a distribution agreement with Regenity, paving the way for the introduction of our first xenograft 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 our revolving line of credit and $5 million to complete the TELA Bio, Regenity transaction, in addition to other Q1 cash obligations. And finally, we were pleased to be able to add 2 new directors during the quarter with the appointments of Tiffany Olson and Dorothy Puhy, 2 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 4 quarterly calls, I provided updates on our progress executing on the following 3 primary growth drivers, which we laid out at the beginning of 2023. One, continuing to build on our leadership position in the Wound & 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 we'll 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 & Surgical markets are benefiting from the products we have brought to market. Over the last 18-months, we have introduced 3 new allografts, 2 geared toward the surgical market, AMNIOEFFECT and AXIOFILL and one for the private office, EPIEFFECT, the launch of which continues to exceed our expectations. All 3 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 2 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 3 more products over the next 18-months, one of which will be our first xenograft 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 U.S. every year, many of which could benefit from the use of our products. While increasing 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 ,[indiscernible] 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 for such products may be more appropriate for various reasons. As a reminder, this is a 510(k) 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 the 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 1 of our 3 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 MiMedx 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 AXIOFILL and our path forward. As you will recall from previous communications, the FDA has taken a position that because AXIOFILL is manufactured as a particulate, it is more than minimally manipulated and therefore, subject to regulation as a Section 351 product for 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 of AXIOFILL is a 351 product. They went out of their way in both responses to tell us why the 510(k) pathway is also not appropriate for AXIOFILL. This was all the more confusing since in February, the FDA issued a 510(k) clearance on a nearly identical human tissue-derived particulate product prior to sending our RFD response. There are now 3 nearly identical products in the market. One has a 361 designation, one has a 510(k) clearance and AXIOFILL, 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 6 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 a good fight for continued access to AXIOFILL as a 361 product, our mitigation plan calls for the submission of 510(k) application on human tissue-derived product later this year. This product will have characteristics similar to AXIOFILL and the 510(k) cleared 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 that we ultimately fail to reach a resolution to keep AXIOFILL 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(k) 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 details 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 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 our topline 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 topline 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 2 of our newer products, AMNIOEFFECT and AXIOFILL. Those products continue 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 revenue by product type, specifically our wound products, which include EPIFIX, EPICORD and EPIEFFECT and our surgical products, including AMNIOEFFECT, and also our new xenograft product that Joe mentioned, recently acquired through our agreements with TELA Bio 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 breakup 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 & 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 topline 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 vesting. 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 $0.07 per share compared to a loss of $3 million or $0.03 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 TELA Bio related to our product portfolio expansion in the xenografts 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've just heard, we had another outstanding quarter, once again exceeding expectations. Net sales were $85 million, up 18% in the quarter. Gross profit margin increased to 85%. Adjusted EBITDA was $19 million or 22% of net sales in the quarter. We again grew in all sites of service. We financed our debt and acquired the rights to commercialize our first xenograft product. Now let me turn to the local coverage determinations, or LCDs that were proposed in unison by all 7 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 4 skin substitute applications per case. Importantly, this year's proposal allows for additional applications based on medical necessity in instances when a patients' 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 is specifically prohibits reimbursement for nearly 180 other products currently on the market. There will be a comment period, which will end on June 8, and the LCDs we finalize and go into effect sometime thereafter, likely not later than October 1 if they follow the same timeline as last year. What does this mean for MiMedx. Two of our products, including our flagship EPIFIX product are among the 15 approved for reimbursement. Unfortunately, the effect 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 for funding and have designed a 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 it 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 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 it's 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, MiMedx 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 MiMedx 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.

[Operator Instructions] And our first question comes from the line of Chase Knickerbocker with Craig-Hallum.

First from me, we saw a little bit of disruption in the wound care market last fall when the LCD was first released. What are you hearing from customers? And kind of how are you guys thinking about how the market is going to react to this? And then particularly around EPIEFFECT, do you expect any 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 healthcare. 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 MiMedx. 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, right? When we get a marquee product that comes to market, we like to invest into evidence to improve efficacy. That trial will start to enroll patients in June. So 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 EPIEFFECT 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 overhang on value today. And it will just -- as an industry, we'll 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, we'll -- 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, there's -- I think you'd be hard-pressed to find a company that's better positioned to navigate this than us.

Yes. And as we kind of think about that long-term kind of benefit that we -- you just kind of talked about a couple of 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 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 grab the majority of that share that becomes available?

Yes. Difficult to quantify available 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 overutilization. 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. As far -- so hard to quantify at this point. I think importantly, even before we launched EPIEFFECT, we were picking up share in private office as some of the competitors were moving the product onto 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 to drive some of our performance as well as just better execution within the sales organization. Look, there's -- I think you'd be hard-pressed to find a product on that -- on that list that has as much evidence and is much market acceptance as our products, in particularly, EPIFIX. 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 a quick -- just one more on kind of the impact here and then a question on kind of the EPIEFFECT 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 you Joe, 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?

Yes. 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, we will get interim readouts. So we'll have good data along the way. The trial will likely produce 4 or 5 published papers. So it will 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 is a practice of the company. Long before my time here, Chase, this is -- the company has been committed to evidence-based medicine.

Our next question comes from the line of Brooks O'Neil with Lake Street.

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 MiMedx. 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 a point where it impacts us, I think we're in much better position to navigate through that. I don't see it as a much of a near-term threat or, frankly, midterm or long term -- for mid long is obviously a plus-plus, as I indicated, as the way we view it. We didn't change our guidance because there's some unknown, 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 we don't -- 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.

Yes. 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 pursuing growth opportunities there. Can you talk just a little bit about some of the near-term things 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 MiMedx relative to history. And just talk about some of these alternate -- let's call -- I'll just call them alternate source products, just recognizing that many of them are not -- I mean, they're not human-derived products. So how big an opportunity do you see in sort of what do you think is your path to go after that?

Yes. 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 submarket and then the amniotic products are probably in the 43% to 45%, which is really the only place we play 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 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 we'll 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?

Yes, 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-derived 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 to grow. 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.

Brooks, we are glad to have you.

Our next question is from the line of Anthony Petrone from Mizuho Group.

Congrats on the really strong performance, 1Q year out of the gate. Maybe back to LCD, and I'll have a follow-up on xenograft AXIOFILL. On the -- I guess, when we look out, you're breaking out U.S. physician office now, you did 30 -- a little over [ 30 million ] in the quarter. how much of that U.S. physician office today is EPIFIX and EPICORD versus EPIEFFECT? 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 of follow-ups.

Anthony, I'll just start by saying thanks for the congratulations. We're 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 at the effect 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 on EPIEFFECT is accessible as well.

Yes, only thing I'd add, Anthony, is it's only kind of second quarter launch of EPIEFFECT and EPIEFFECT as Joe mentioned in the prepared remarks, flagship product, I mean it's head and shoulders above the rest of the portfolio.

That's helpful. And then Joe, helpful on quantifying here, 60% to 80% of the activity let's say, using a base year of 2022 or maybe even 2023. Within those non-covered products, you also mentioned that there's some overutilization and some pricing in that number when I think you look at that 2022 Medicare number that was north of $1 billion. 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 billion, $1.2 billion CMS 2022 number for U.S. physician office for skin substitute products?

Yes, that was 2022, we would know 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 majority of it is probably price, is this based on what we have seen in the marketplace, I just put the cautionary comment out there. If you take the price equation out, there's probably -- I think logically, there's, Anthony, there's some overutilization, right? Because I've seen it in every part of healthcare that has 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 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 AXIOFILL basically under the warning letter at the moment. I think the AXIOFILL 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.

Just numerically, Anthony, we've sort of ring-fenced that as less than 5% of our total revenue in terms of AXIOFILL contribution. I'll let Joe respond to sort of clinical evidence requirements that we expect around the proposed LCDs.

Yes. I don't see that as a burden needing to get some pre-off for medical necessity or at least I don't know if it's going to be a pre-off 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 AXIOFILL, xeno...

What would Xenograft bring in from a lower 12-month standpoint?

Yes. 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 from our 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 3 products in the last 18 months, all 3 products has 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. So I feel highly confident that we'll have a level of success with this product as well. And AXIOFILL hit some headwinds early in '23 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 lost revenue there.

Our next question comes from the line of Carl Byrnes with Northland Capital.

Congratulations on a quarter. Most of my questions have been answered around the LCD in terms of the 60% to 80% that will be up for grabs. I guess a follow-up there is kind of looking at the players in the space, do you see any potential for some of the companies to -- you know end up in 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?

Yes. I don't think I will comment too much on that, Carl. 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 1 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.

The next question is from the line of RK from H.C. Wainwright.

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 really require to see a final clinical data?

Yes. 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 and it has a well-known cycle, proposed rules in July sometime usually final in November timeframe-ish and then implemented thereafter. So we'll be part of that cycle from a pricing standpoint. Coverage determinations typically aren't reset every year. Clearly, the 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 overbilling the system. So these are steps, I believe that they are taking specifically to attempt to address that. And there might be -- this might not be perfect, RK. It might have to go through some iterations before it settles down. But 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 were on the hook for copays 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. And then in terms of the xenograft product, which you're bringing on board, I know you said you cannot come up with the guidance for the next -- for Anthony's question regarding forward 12-month. But in general, how -- 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 AXIOFILL was doing, which was like 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. 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.

Our final question comes from the line of John Vandermosten with Zacks.

I'll start out with just asking about the preparations that 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(k) clearance in place, and there was a certain amount of work that had been done from a clinical perspective as well. So we had a good running start when we acquired it. So there's pricing, GPO contracting, 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 that you start to -- once you put the product in the market, you'll learn a little bit to 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, is that going to -- do you think that will help accelerate the penetration of the product to your customers?

Hard to say that, 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, 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.

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

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

When you scale an organization, sales organization, it's both, you're looking for improved productivity. We talked about this, I think, on our last call, the productivity per sales [ FTE ] is up dramatically year-over-year. We -- in 2023, revenue grew by about 20%, which was 100% volume driven. And if you look at sales force productivity, that was probably nearly double that because we were doing it with less FTEs. So yes, we're -- 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. And 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 cost...

John, no, it's a really good question. But while we had a modest spend in Q1 at 3% on topline, 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.

At this time, I will turn the floor back to management for closing remarks.

Thanks, operator. Appreciate it. Appreciate all the questions today, guys. I 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.