MiMedx Group, Inc. (NASDAQ:MDXG)
Q1 2017 Earnings Conference Call
April 26, 2017 10:30 ET
Thornton Kuntz – SVP, Administration
Pete Petit – Chairman and CEO
William Taylor – President and COO
Christopher Cashman – Chief Commercialization Officer
Michael Senken – Chief Financial Officer
Mark Landy – VP, Strategic Initiatives
Mike Matson – Needham & Company
Matt Hewitt – Craig-Hallum Capital
Good day, ladies and gentlemen, and welcome to the MiMedx Group, Incorporated Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference, Thornton Kuntz, SVP of Administration. Please go ahead.
Thank you, operator and good morning everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management, and are subject to risks and uncertainties.
Actual results may differ materially from those set forth in, contemplated by, or underlying the forward-looking statements, based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2016 and our most recent 10-Q. We do not undertake to update or revise any forward-looking statements, except as may be required by the Company’s disclosure obligations and filing it makes with the Securities and Exchange Commission under Federal Securities laws.
With that, I’ll turn the call over to Pete Petit, MiMedx’s Chairman and CEO.
Good morning. Thank you for joining us for our first quarter 2017 conference call. I have with me today Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer; Chris Cashman, one of our Executive Vice Presidents and Chief Commercialization Officer; and Mark Landy, our Vice President, Strategic Initiatives. There are other executives in the room with us.
I’m going to start by giving you some overviews of our first quarter revenues, profits and cash flows; I’ll also review some of the discussion we had on the March night call when we announced our new strategic plan and vision from MiMedx and I’ll give you couple of other updates. As we previously announced our first quarter revenues exceeded the upper end of our guidance and reached to $72.6 million, that’s a 36% increase over first quarter of 2016. This very nice increase took place in spite of our first quarter having normal seasonal constraints from health plan benefit resets and weather making it difficult for patients to visit their physicians. In addition, we had some slight dislocations associated with the terminations of seven sales employees for cause and replacement for new sales person [ph].
As we look forward in 2017 we are very confident about our revenues continuing to grow in a robust – at a robust pace as we have forecasted. We’re confident our second quarter continuing our growth trends; however, we are very confident about third and fourth quarter growth trends because we will have completed the wind out of our AvKare contract and those administrative distractions. You saw the increase in our profitability over the fourth quarter as we’ve previously stated our profits as a percent of revenues and overall, profit should increase very nicely during 2017 because we have most of our new product expanded tours promotions behind us that we talked about taking place last year. Therefore we should expect to see an increasing degrees of profitability as the year unfolds.
As we stated, we built cash rapid [ph] during the quarter and that allowed us to repurchase over $12.6 million of our very undervalued stock during the first quarter. We still have approximately $17.3 million of our current repurchase program in place. We will continue to purchase our shares when we consider them undervalue. We have had a significant increase in our market capitalization last month or so; however, according to metrics established by a number of investment – the company is still undervalued. When you combine our rapid rate of revenue growth wrapped right at profit growth, gross profit margins approaching 90% and our proprietary technology – this biopharmaceutical activities, MiMedx is still undervalued in our opinion and the opinion of others.
I would like to take a few minutes to review our strategic vision from MiMedx. As we discussed, MiMedx is transitioning from a wound care and surgical products for Janet medicine business to a biopharma company that is also focused on therapeutic medicine. We’re very capable of making this transition because of the strong asset base we’ve developed over the last five or six years. This asset base will allow MiMedx to proceed down two parallel pathways which can both be classified as a biopharma related therapeutics, as well as regenerative medicine. I’ll remind you again how we defined biopharma which is a term as well defined in the regulatory literature. This simply means that MiMedx will have new products that will necessarily take up biologics license application or BLA pathway towards FDA “approval” for “indications for use.” This will require a more lengthy and costly BLA process as opposed to using the Public Health Service Act 361 regulations, the company is operated under which is government use of human tissue products.
Please remember however that we’re already well into our first when we study leading to our first biologics license application from the FDA. For over two years into the study and things could not have gone smoother to this point. Please recall because of our clinical experience with this product is a 361 we were allowed into the ID process and Phase 2b for the approval of clinical efficacy and bypass the safety phase of 2a. We will be discussing results of our 2b study this summer and we’re in the process of preparing to enter into our Phase 3 study. We already have our manufacturing facility operating under “good manufacturing practices” which is much more complex than operating under just “good judge of practices” which we’ve been functioning under for many years.
To put this in perspective you should understand that biopharma companies are in the business of isolating certain molecules such as proteins which are going to have certain therapeutic effects. They can spend years and millions of dollars just beginning the process of isolating the molecules, conducting preclinical tests on animals, conducted safety tests before they ever get into the initial phases of clinical efficacy testing which is 2b; after completion of 2b they complete to be in a process by completing Phase 3 trials.
After that long and expensive pathway is complete they will have FDA “approval” for the drug or biologic. At that point reimbursement for this particular approved drug or biologic is relatively straightforward and is easily expedited, emphasize expedited. This is contrary to what MiMedx went through, all of very efficiently over the last five years and obtaining broad national coverage for our products. We had an arduous task going payer by payer with our numerous clinical and scientific studies to document clinical efficacy. Once we had our BA approval, we will submit to obtain a JACO [ph] for reimbursement. At that point we will have our indications for use which came from the IND clinical study and FDA approval and reimbursement generally flows quite broadly and quickly from there.
So what MiMedx has it is very unique and not just utilize a few molecules on which we will have to initiate the full PMA or be able to process to pain approval but a tissue material that has at least 220 very active proteins that are proven to be very effective relative to healing, scar tissue reduction, production of information, creation of angiogenesis and stem cell attraction. There are numerous ways that this milieu of proteins of factors can be brought to bear to improve clinical outcomes. Therefore, we believe we are uniquely positioned with not a few molecules but over 220 proteins where we have already clearly characterized our method of action to our scientific studies and clinical effect and this to our other numerous clinical studies.
Therefore as we developed our IND BLA study proposals, we have an excellent IND, we had a plan and execute the study for maximum effectiveness and efficiency. Generally we’re going to be able to move into IND BLA process towards the middle of those studies rather than beginning from step one. We should be able to cut out several years of preliminary study, activity and be very effective with the study plan with that cost of additional time all reduced. If you will save [indiscernible] simple facts based on the asset base we built over the last six years, you’re going to see what significant advantages we’re going to have as we run these parallel pass and continuing the sale on our 361 regulated products and then began to bring our BLA “approved” products to the market.
On our 361 program, market for intended uses as they’ve always been under IND BLA approved products we will be granted FDA approval for certain indication for use; that is when our reimbursement come Jayco [ph] which is much more easily expedited. I want to also point out that I do not think that any of our existing competitor is in a position to accomplish what we’re doing right now without putting in at least seven years of asset development. No one as a clinical staff and over 30 clinical studies currently underway on for center-based products. The scientific staff with numerous scientific studies underway, to experience regulatory staff and three production facilities were the main facility approved already under good manufacturing practices.
In addition no one has a U.S. pharmacopoeia monograph for the membrane products. No has a patient portfolio that we have passport photos that we have. No one has progressed to patent litigation for over two years like we have which means we’re approaching our first trial where we expect to be successful no one has a large and very effectively trained sales office; we have 325 individuals that we have and I want to emphasize highly trained; these are specialized sales personnel that know the physiology of wound healing and the science behind it.
Now I’ll provide a brief update on our lawsuits against two former sales employees and account of suits and their allegations associated with so those counter-suits. I’m on record as classified allegations and countersuit claims as being fallacious and misinformation. I think you know how to interpret that. You’re already aware that the audit committee of a Board of Directors work closely with outside and independent council to conduct investigation allegations, there was no indication of any wrongdoing by management. As we previously announced the investigation determined that there was no credible evidence to indicate that any changes to the company’s previously issued financial statements were necessary in light of these allegations. We believe the fallacious allegation made were done to intimidate MiMedx, that approach obviously failed.
We’ve been informed that all the lawyers previously representing the two main defendants have withdrawn from their representation of these individuals or will be withdrawing today, reflect on that. We have submitted information to the Georgia Federal Court that we believe demonstrates one of the defendants made false statements to the court, the other defendant made false information to the state unemployment agency of Wisconsin. This should give you some idea of the type of individuals involved here. I expect these lawsuits will eventually go to trial or be settled with these individuals paying the medics retribution for their violation of our legal agreements by selling competitive products into the hospital accounts.
Thus this most recent pebble in our path has been harmless professionals could be expected, replacing those matters behind us and we’re looking forward to a tremendous really productive and fast growth 2017 and beyond. We’re now enthusiastically welcome you to the new MiMedx as a biopharma organization. We look forward in the months ahead to reporting on our first Phase 2 study results in our [indiscernible] product. We will also be announcing shortly additional R&D billing program for other FDA study. Additional, we will be announcing the results shortly to randomize multi-center clinical trials, where you should have effects on you as well as did a few patients these are all very exciting events to a play out there in 2017.
Okay. Now let me start discussions I would Bill Taylor, our present Chief Operating Officer. Bill?
Thanks, Pete. Q1 2017 was indeed an excellent quarter by nearly every measure we have, in particular compared to last year and even compared to previous years. This first was particularly satisfying and that we were able to perform quite well with significant sequential growth, even what is typically the softest quarter of the year due to weather and reimbursement resets. I think this is a testament to the changes we made last year in our Sales Management System or SMS, as well as the leadership and has emerged from our field sales force made a number of personnel reassigning’s over the past five quarters and brought in some very seasoned professional managers who’ve contributed significantly to the organization making our business stronger.
And a few sales managers that have been with us for several years are developing into better managers; not published on executing more detail sales initiatives and helping to grow the business by managing deeply into specific metrics and initiatives for each territory. We project another good in Q3 grope order to keep you even better to the end of the year to spend a good percentage of our time focused on efficiency than our silvers, as well as other areas of the company. In fact, we’ve had specific resources dedicated to process improvement issues. Over the past several years both our farm and did a fine job of proving I don’t process, there are explosive growth however, our business complexity continues to increase therefore we have a need to create the additional focus of specific process improvement research.
We don’t run the company for what we need today we are building systems, integrating prophecies and creating an organization that will support and take us through $0.5 billion of revenue and beyond. As you know, Q2 of this year is the last quarter of our contract with AvKare, our distributor for federal sales. We have had a strong relationship with them for nearly five years. More recently, we’ve operated with both our own FSS and the one through AvKare. By the end of this quarter we will be operating through just our FSS contract. This transition period has been complicated and the challenges create certain inefficiencies. The great news here is that starting July 1 these inefficiencies will be lessened considerably and we expect improvement in our federal business in the third and fourth quarters as our efficiencies being dragged in the federal sales channel are optimized.
We’ve sealed our upper end of the guidance in Q1 even with efficiencies, so we’re looking forward to what we can do in the back half of the year once these are no longer run [ph]. The field sales force goes and to continue to focus on territory management and growth, we played on ending Q2 with approximately 335 to 340 total field sales personnel. Our informatics team closely works with our sales management team, helps us map our territory management plan typically three to four quarters out. This helps our planning process significantly. So we already have a pretty clear picture of where we expect to add resources over the balance of the year and what’s the sales trajectory will likely be.
Turning now to intellectual property; we have no significant new news since our February and March conference calls. We still feel good your position and look forward to our upcoming patent rights. The first trial date has not yet been set but we hope the judge will schedule it in the near-term.
Next, I will discuss some key elements of these very strong assets. MiMedx has over 100,000 with patents placenta with 46 of them think placenta based tissue; and over 120 pending private or see stay out of appeal. We won’t tall rated applications, we will infringe our rights. So what does this mean to MiMedx and how does it affect our competitor’s freedom to operate? Well, let me give you a few examples; one of the parties in our current patent lists process as result of our lawsuit by employment procedure that does not appear to file either patents. We believe this changes a direct result and we view this competitor’s action as a significant business from MiMedx since resulting allographs are not as clinically and therapeutically effective as those are offered and protected by MiMedx.
Therefore in order for the company to – that company to have freedom to operate, they had to change their process away from our patent. Now you probably remember two approaches where companies do have freedom to operate are around our patents are; one, a single layer product which we’ve discussed many times over the years and we have published data showing inferiority of such graphs. And two, allographs made from intact amniotic sac which we discussed in the last few calls; amniotic sac consists of the amniotic membrane and chorionic membrane; these are not separated, they must be cleaned thoroughly and is very difficult to remove all the blood to render it safe and effect. These clean methods are necessarily harsh and result in the inferior graph [ph].
So the answer to the myriad questions we received overtime about whether MiMedx patents are defendable is yes; I described several of our recent wins and I think it’s obvious that our core patents have already proven to be defendable. We expect two of our case to head the trial later this year as I mentioned; and the near outcome of those proceedings should determine whether the company we have sued need to violate our patents. And again, the fact that one of those competitors have already created a different in our scientific view inferior grasp to try to avoid our patents means it’s a good business win for our patent portfolio. But I’d also like to remind us some historical performances of a few companies in our space; Cellgene, BioD and Cyrus all entered the space prior to MiMedx and all had single layer allographs. None of you have been able to match our revenue or growth rate in this product area.
Our closest pure play competitor in the placenta tissue space was BioD which was acquired by Derma Scientist last year, an interesting story relative to this isn’t – in 2010 before we entered this space we contacted BioD to inquire if we could find a way to work together. They declined and we moved on and worked with Surgical Biologics. Six years later we ended the year at more than 10x BioD’s revenue in 2016. After all those years they made single layer graphs only which do not infringe our caters. After six years of competing with a single air graph, late last year they introduced the dual layer graph; is our opinion that they are multi-layered grab, steps on one or more of our patents we have given nervous I position and they ever to in notice of our IP.
To summarize on IP, we have said for years and that we would invest in patents and defend them but the real battle will be fought in the marketplace. I think our record shows that we’ve done quite well in that regard.
That said if we find companies that look to be violating our patents we will protect our property and pursue legal remedies. I think the industry is beginning to find out, they do not have they do not have the freedom to operate but they thought they had when they tried the copy of our products. And when the notice is delivered, they can be assured it is not a box of chocolates but rather something much more serious. To-date notice is important because it starts the clock on damage and not damages but allows the possibility of triple damages. So if the competitor is going to gamble, they have freedom to operate; they better hope that they are, right otherwise the damages can be quite large and that doesn’t even count the attorney’s fees that might be recovered.
I expect that we after we successfully complete a few of our current patent lawsuits whoever strong position and could possibly even get it jump to really only do violate sort of orders. So our notice of imprisonment that appears to be a box of chocolates to some quite possibly could become a ticking time bomb for those companies that are not careful around our patents. Our clinical studies continue to move forward and we expect some key data readouts over the next several months. Specifically we will have data regarding two large study’s on wounds, one below human and one PFU that we’ve spoken about before and our first biopharma injectable product which is the financial results. We hope to move in the Phase 3 trials on that program later this year.
Related to the clinical study in our R&D pipeline, we’re not yet ready to go into detail on this but I want to give you a short glimpse of something we are considering. We are evaluating our pipeline and the planning and timing of our follow on biologic drug products. We are considering alternatives that may allow us to initiate some of these phase studies a bit early than what we have originally planned. This may bump up our R&D spend by a percentage or two in the short to mid-term but we expect it will pay dividends down the road, particularly if the regulatory environment becomes more balanced and especially some of our new products qualify for the 20% [ph]. As we have mentioned previously, management can control the throttle or more expenses up or down pretty well as we see opportunities that can give a large return on investment we may decide to accelerate some areas of spending in order to drive increase of revenue.
So after we complete our review we will advise and update our forecasted R&D expense projections. Now for clarity we’re talking about potential increments that are likely in the 1% to 2% range in R&D spending as a percentage of overall revenue.
With that I’ll turn over to Chris Cashman.
Thanks Bill, good morning. We’re pleased with the progress that we made in the first quarter. We grew revenues 36% year-over-year overall, and revenues were strong in both of our market focuses of Wound Care and SSO. Wound Care grew first quarter 40% over prior year’s quarter and SSO grew 26% over the prior year’s quarter. What was most notable about this performance is that there was nothing special or exceptional. This is a continuation of our strong sales momentum carried forward from 2016 in our core business initiatives. Additionally, our three new product initiatives of EPI and Amnio Chord, Amnio Fill and [indiscernible] all made solid contributions to our revenues and continue to find their place in our portfolio.
I’ve shared before the first quarter is normally the slowest revenue quarter of the year, this is due to multiple different factors such as deductibles reset, many surgeons take-off in parts of January after a heavy case load during the holidays and year-end. The weather could be an issue and this year specific to MiMedx, a few centers associated with individuals, we had to let go for selling competing products went through transitions. Nevertheless, we continue to exhibit strong momentum in our business and we feel good about the ability to continue to deliver on revenue growth as we have communicated.
Recall, our revenues fell short of guidance a year ago as we went through distractions of sales force realignments and implementation of a new sales management system. Now one year later our management understand their own business much better and our analytical processes and SMS planning are forming how we target our competitive threats, how we plan, launch and track our new product introductions, where we add our new representatives, how we realign territories with a purposeful cut to grow mission, and a much improved sales management system and business planning process. We have raised the business acumen of our management and our county executives have better information and improved focus due to our SMS program.
For 2016 SMART Track reports that $680 million was spent in the U.S. skin dermal substitute area; that’s a 15.4% growth over 2015. The data shows MiMedx has grown to a 31% market share from 24.9%, again a 6% increase over 2015 and MiMedx makes up approximately two-thirds market share of all amniotic products spend and is growing. However, MiMedx is not just taking share, the U.S. market continues to expand and we believe that it is largely based on the value proposition that the EpiFix delivers leading the way. By 2020 estimate show a $1.1 billion spend within amniotic products making up half of those dollars.
Through our market awareness programs, peer to peer educational events, and continuing clinical investments which include large multicenter of our CT’s in VFU and VLU that will report top line data by summer; we feel very positive about the sustainability of our wound revenue trends for the next few years to come. We believe the chronic wound care market remains an underpenetrated opportunity. In the U.S. in 2015 the annual cost of treating chronic wounds was $25 billion. Of the 6.5 million wounds that are treated, there are 3 million chronic, non-healing wounds each year; and fewer than 150,000 patients receive a skin dermal substitute.
MiMedx’s focus in the Wound Care clinic has been the 1.4 million diabetic foot officers and venus leg officers. The commercial portion of our insurance coverage has been predominantly for DFUs. However, with the expected publication of new multi-center VOU clinical data which the interim look reveals a significant improvement of healing at 12 and 16 weeks meaningfully improving on Apple graph’s healing rates taking 24 weeks. EpiFix will have an opportunity to expand into the approximately 500,000 total VOU patients each year. With expanded positive Venus leg ulcer payment policy, we believe there is an immediate $75 million to $150 million that can be – and this opportunity doesn’t even contemplate the approximately $1 million acute pressure ulcers that could benefit from our products. I want to emphasize there are plenty of wounds left to address.
We have shared our evolution into a biopharma company developing regenerative and therapeutic biologics. By 2020 we project we will have revenues of more than $0.5 billion comprise of our four regenerative products in wound and SSO and we’ll have expanded into the pain management office setting with both 361 and VLA indication products in soft tissue and joint pain. This office based pain management market has $4.7 billion in spend, just in the knee, foot and ankle with over $900 million in competitive high [indiscernible] acid products like [indiscernible]. Our planner fashion as top line Phase 2b study data will be disclosed mid-year. We expect it will show similarly successful outcomes to predecessor studies and will be a boost to our sales efforts in the office.
As we enter the late spring and summer months, we will continue to educate the marketplace and healthcare professionals on the risks of virus transmissions like Zika in tissue and allograft that are not generally sterilized. The MiMedx flagship amniotic allografts have always been internally sterilized. Surprisingly a large cohort of competitors today aseptically process but do not sterilize. MiMedx’s process internal sterilization validations provide a less that one in one million probability of a non-sterile unit which is at least 1,000x higher safety margin than typical aseptically processed tissue products. This product process advantage continues to be a cause for hospitals and providers using competitive products to seriously contemplate converting and trying EpiFix or AmnioFix and MiMedx.
In the last six months three market changing announcements have occurred which deserves noting. First, Integra acquired Derma Sciences in Q4 2016. Derma Sciences Amnio-matrix and Amnio-excel products generated total wound revenue of approximately $3.3 million last year. Notably concerning Integra’s Omnidirect product, CMS Hospital outpatient numbers are just out for Q3 last year and spend came in at $41,000 for the third quarter; and in total $68,000 for the nine months of 2016. Based on this lack of Omnigram progress which was forecasted to approach $10 million at revenues last year, Integra has invested in their second amniotic technology platform in two years and fourth wound product for the same applications. Confusing, I think so.
Putting any potential IP infringement aside on new product introductions, our company has to win in the marketplace. We have studied their single layer amniotic product, Amnio-excel and shown that 69 of 70 factors important in wound healing are higher in EpiFix. Understand, they don’t have commercial coverage like MiMedx, they don’t have a compendium of studies supporting efficacy thereby use like MiMedx. Actually their only study shows 46% healing at six weeks. The concept that a portfolio of products as in offloading groups, dressings, ointments and skin substitutes is able to be bundled in a highly strategic and successful manner is a misconception, they are independent utilization decisions. It is very important to note in the wound care clinic and office setting each has a value proposition and reimbursement coverage decision.
Commodities cannot be leveraged to improve advance therapy utilization, in fact look at Derma Sciences own history with its portfolio. The attributes are not there to make this successful as evidenced by the performance since 2014.
Second, just over a month ago Organogenesis announced the acquisition of NewTech [ph], a Birmingham-based provider of Amnion Technologies, predominantly in the fluid form for orthopedic and spine use. I guess the mantra would be, if you can’t beat them, join them. OI have been very active and vocal over the last four plus years about how amniotic technologies don’t work and our regulated appropriately. They attempted to cause many issues for MiMedx that the VA System, CMS, FDA and even one of their senior executives was a relator in an OIG investigation of MiMedx two years ago which we quickly resolved. Their pure play wound dressing comes up pass-through at years end, this is clearly a desperation move to bolster continued eroding Epi graph revenue and market share.
And finally, Osiris [ph] announced that they are joining the way MiMedx has been processing shop-stable amniotic products since they can’t be in a profile to lyophilize shelf-stable product process for the market. They acknowledge the shortfalls in their graphics and related products in their press release of March 30 stating crowd preservation requires ultralow temperature freezers and dry ice or liquid nitrogen for storage which limits the widespread use of cellular therapies. They further claim that they come up with a lyophilized means to preserve living cells in their tissue membrane and store at ambient temperature. They also stated that an article regarding this new process would be published in Nature, the next day. Understand that this was not a peer reviewed scientific journal published paper, it was a full page paid for advertisement profile; these advertisements are not reviewed for accuracy, nor is Nature featuring it for scientific reasons, it is a pay-for-advertisement.
MiMedx has shown its superiority of bioactive DIAC [ph] and we see no actual scientific evidence presented that would suggest Osiris [ph] can do what they say in regards to preserving living cells even after lyophilization. We fear that this promotional messaging will only serve to confuse professional wound care providers as Osiris moves to processing shelf-stable products which MiMedx has been doing as a regenerative leader since 2006; more to come on this front.
So to reiterate, we continue to make very good progress in the marketplace establishing new procedural uses, market share acquisition and driving market use expansion across all of our business verticals. We have very strong revenue growth momentum which began in the second quarter last year and we expect it to continue this year as we have communicated.
And now I’ll turn it over to Mike Senken.
Thanks Chris, and good morning. The company recorded revenues for the first quarter of approximately $72.6 million, an increase of 36% or $19.2 million over prior year first quarter revenue of $53.4 million. The increase reflects the continued momentum in commercial wound care sales in contributions from new product sales in AmnioFill, OrthoFlow, Epi and AmnioCord products. The increase was somewhat offset by a lower revenue contribution from stability biologics products primarily driven by the decision to discontinue sales of lower margin products, as well as the expected wind down of sale to AvKare as we transition to direct sales to our own FSS schedule.
We saw strong growth year-over-year of 40% in wound care coming in at $54.9 million and SSO revenue growth of 26% coming in at $17.7 million for the quarter. GAAP gross margins for the quarter were 88% as compared to 85.1% in the first quarter of 2016. Adjusting for the amortization of the Stability Biologics inventory step up, gross margin was 88.1% in 2017 as compared to 86.5% in the first quarter of 2016. Included in the press release is a reconciliation of GAAP gross margin to adjusted gross margin. The year-over-year improvement in gross margin is due primarily to higher sales volume and improved product yield.
R&D expenses for the quarter were approximately $4.2 million or 5.8% of quarterly revenue as compared to $2.5 million in the first quarter of 2016. The increase is driven primarily by increased investments in critical trials including the BLA trial for plantar fasciitis, as well as the large multi-center VOU and DFU trials. Our guidance assumes increased year-over-year investment in clinical trials as we pursue our biopharma strategy.
Selling, general and administrative expense was approximately $53 million for the quarter or 72.9% of quarterly revenue as compared to $40.6 million or 76.2% of quarterly revenue in 2016. Included in 2016 spending was approximately $713,000 in one-time charges related to the acquisition of Stability Biologics. The year-over-year increase in SG&A spending was due to the continued build out of our direct sales force in both wound care and surgical markets additions to the reimbursement, credit in collection, and informatics teams, as well as legal costs and regulatory costs in support of international market expansion. We expect to see continued leverage in subsequent quarters while adding to our direct sales force over the course of this year.
The company reported a positive adjusted EBITDA of $12.4 million for the quarter ended March 31, 2017 as compared to $9.1 million in the first quarter of 2016. It is the 21st consecutive quarter of reporting positive adjusted EBITDA included in our press release of the reconciliation of adjusted EBITDA to reported net income. The improvement is driven by increased sales on it. GAAP operating income in the first quarter was approximately $6.2 million or 8.5% of quarterly revenue as compared to $1.5 million in 2016. Operating income included charges related to the Stability Biologics acquisition of $75,000 and $1.4 million in 2017 and 2016 respectively. Higher operating income in the quarter was driven by increased sales volume and improved gross margins, somewhat offset by the after-mentioned investments and clinical trial additions to the sales and marketing organizations for both wound care and SSO markets and administrative support.
The company reported net income for the first quarter of approximately $4.3 million or $0.04 per basic and diluted common share as compared to net income of $1.2 million or $0.01 per basic and diluted common share in the first quarter of 2016. On a non-GAAP adjusted basis, first quarter net income was $7.4 million or $0.07 per diluted common share as compared to $4.9 million or $0.04 per diluted common share in the first quarter of 2016. Please refer to the table in our press release for reconciliation of GAAP net income to adjusted net income.
Turning now to the balance sheet; the company reported approximately $121.9 million in total current assets including $30.9 million in cash, $66.8 million in accounts receivable, and $16.1 million in inventory. Day sales outstanding for the quarter were 83 days as compared to 86 days at the end of the prior quarter. We expect this trend to continue in subsequent quarters after introducing new processes focused on improved collection performance, as well as the addition of credit and collection associates in support of our growth. Inventory turns were 2.2 for the quarter as compared to 2.0 at the end of the prior quarter. The improved turns reflect the normalization of inventory levels of new products launched in the third and fourth quarters of 2016. And total liabilities for the quarter were $59.5 million as compared to $60.3 million at the end of the prior quarter.
Turning now to the statement of cash flow; the company reported net cash from operating activities of $10.6 million as compared to a net negative cash flow of approximately $1 million in the first quarter of 2016. The improvement was driven by higher net income and improved working capital management. Cash used in investing activities was approximately $1 million as compared to $9.3 million in the first quarter of 2016 which included the $7.6 million related to the purchase of Stability Biologics. Cash flow used in financing activities was $13.1 million including $12.7 million in share repurchases. Since inception, the company has returned $68.7 million to shareholders in share repurchases and there is approximately $17.3 million still available for repurchases under the current authorization of $86 million.
And finally, we end the quarter with a total of 705 employees, an increase of 105 as compared to the prior year. Now turning to our guidance, MiMedx estimates second quarter revenue to be in the range of $73.5 million to $75 million and we raised the lower end of our full year revenue guidance to be in the range of $303.5 million, up from $302 million with the high-end of the range remaining at $307 million. The company is maintaining its full year guidance for 2017 GAAP EPS of $0.18 to $0.20 and adjusted EPS estimated to be in the range of $0.31 to $0.33. We see the tables included in our press release for reconciliation of GAAP EPS to adjusted EPS.
With that I will turn the call over to Mark Landy.
Thanks Mike, and good morning everyone. As we have said today, a biopharmaceutical transition is progressing nicely and operationally we’re making very good progress. Enrollment in our Phase 2b plantar fasciitis clinical trial is wrapping up and we are preparing to a numerous FDA needs. In line with current guidance, we expect to release interim Phase 2b plan to fasciitis data and file an IND for amniofixing fixing jet fuel as a treatment for knee pain caused by osteoarthritis during the summer. Through a lot of art work and some fortitude, MiMedx is in a unique and very fortunate position.
Our core technology platforms provide a deep product pipeline, they give us the opportunity to very efficiently bring new products to market that address large unmeet clinical needs. We believe the indications we are pursuing and will pursue in musculoskeletal pain, respiratory disease and cardiovascular may represent multi-billion dollar markets. In our view these indications stay nice of revenue growth rates in the years ahead and drive meaningful earnings leverage. The transition we’re undertaking does not just encompass development, regulatory, and commercial activities. It is broadbased and includes benchmarking the company against the most appropriate peer group. This is extremely important because that drives alignment of corporate culture and provide the ability to recruit and retain the very best talent. Our recently filed proxy statement reflect some of the activities we have undertaken.
How MiMedx is used by the capital markets and the peer group investor use to benchmark and value the company; it’s an important component of our success. Until our biopharmaceutical transition is well understood, management must keep investors informed, educated, and up-to-date. We must do this to ensure we have correctly benchmarked, always valued within the appropriate context and introduced to the right institutional investment groups.
Presentations made to management by the financial institutions confirm our views and the comments we presented on the March 9 shareholder update call. We believe that MiMedx at this point in its transition should be bent benchmark against the peer group comprising a mix of high growth make and biopharmaceutical companies. The average enterprise value to revenue multiple of one such life sciences peer group is 8.7% for 2017 and 6.9% for 2018 with a median of 8.3% and 6.9%. At its current market capital, MiMedx enterprise to revenue multiple is 4.7 for 2017 and 3.9 for 2018. This represents a 45% discount for both years.
With that I’ll pull – I’ll hand the call back to Pete.
Thank you, Mark. Well, I hope you understand management’s enthusiasm of what has been accomplished first quarter and our positive outlook for the remainder of this year and beyond. Also I hope you understand our enthusiasm related to our transition to a biopharma company and a huge opportunities at office to us. Also as we have certainly just discussed, we feel that MiMedx is at least two to three years ahead of our competition relative to reimbursement, GPO and IND contracts, the state-of-the-art production facilities with automation, capability to manufacture and the good manufacturing practices or GMP. Production facilities with increasing amounts of automation, a well-trained sales organization of over 325 individuals and growing; an information and technology infrastructure managing all aspects of our business.
As we’ve clearly stated that we believe it’s going to take the best competitors several years to match where we are today; then please consider where we will be at that point. Chris Cashman gave you numerous facts on certain actions by our competitors, please reflect on those. We hope the details on our first quarter as well as some additional commentary on a new strategic initiatives in the biopharma has been helpful, and puts into perspective where your company is headed the next several years.
Now I’ll open the call for questions.
[Operator Instructions] And our first question comes from Mike Matson from Needham & Company.
Hi, thanks for taking my questions. I guess I just wanted to start with the transition away from AvKare. So can you just talk about how that was structured? Were they a stocking distributor or you were paying them commissions? And then what sort of impact will this transition have on your revenue and margins?
Well, I’ll comment on margins real quick they were afraid. You’ll see our operating profit as a percent of revenues go up. I’ll let Bill comment on the other.
Yes, we’re a stocking distributor and what were the time as was got our FSS. Obviously we had some customers that brought RSS – FSS schedule, goodwill some of off theirs we actually had some that were in the middle of the box some products off of our contract and some on there. There were a number of – our newer products for instance in some of our new use were not converted that would last two years. So we were necessarily – and many cases saw possible contract into the same facility so that’s one of the reasons why the transition has been rather complicated. If I can add Mike, as stated, we started this transition actually going back to 2015 celebrated in 2016 and it’s winding down in 2017. So it’s any more urgent impact plus or otherwise is factored into our numbers.
Okay. But there were stocking distributors where – I assume you’ve signed the products of some sort of transfer price of your pricing which effectively go up and I know some of this is already kind of run through the piano like a house but is that correct that your pricing would end up being higher in the first margins on that business?
Yes, that’s correct Mike. But again that has been kind of run through the P&L over the last – almost two years. So you’re not going to see a dramatic change come the second half of this year as we wind it down, let me keep in mind that AvKare is a stocking distributor, we’ve been transitioning different facilities overtime and when a facility is “clean” and they’ve wound down the AvKare inventory then we move in there as a Director our FSS. As Bill mentioned there were a couple or few that we’re kind of going through both FSS contracts which created some confusion and – but that will go away, come the middle of this year but again in terms of modeling out margins in the second half of this year, I would just say that what you’ve seen over the last – certainly over the last 6/9 months is already takes that into consideration.
And Mike this is Pete, let me conform what Mike said what I said. The margins gross margins have gone up gradually as we’ve moved away from selling more through them or through our direct FSS number. And therefore operating profits will follow through with that. Mike’s pointing out that this transition has been underway for quite some time so the margins have been escalating during that period of time and will begin in July 1. All of those factors are pretty much behind us, so last half the year you should see us operating without any influence and the administrative overhang of having to very carefully work both of these contracts at the same time.
Okay, I understand. I mean your wound care growth in the last couple of quarters has accelerated, so I mean does that have anything to do with this transition or is it just the sales management system and just better productivity out from your reps and de-reps and things like that?
No, I think that can be attributed to what we did a year ago and try to explain to our shareholders that we’ve put in an extremely effective new sales management system. Again, from my standpoint I’ve transitioned in this way previous companies several times and as you grow rapidly there is various things you must get in place and we did that perhaps six months later than we should’ve but it took a little bit of – went out of sales first quarter last year, this is sales on-station has to get readjusted to managing things in a different way but I can assure you that we have an extremely effective sales management system. I think our sales personnel now are operating in a whole different realm of efficiency and effectiveness and that’s what’s given us this kind of momentum.
Okay, thanks. And then Bill’s comment about the sales rep lawsuits; so I would assume – or am I correct in assuming that what the attorneys were drawing that these are officially dead or is there some potential for them to go out and hire new attorneys or some way that it’s been?
Well, I think that needs to be read simply is an advance; it’s rather rare for attorneys to withdraw. They can hire new attorneys, we’re waiting to see what happens there but it should be an indication of the nature of this whole activity and the individuals involved and their own personal goals associated with it. And again it’s been very detrimental to the company, we can’t deny that, it’s taken a lot of effort and time but as usual this management team has been affective and whatever we encounter and we’ve gotten got through it with us it’s going to be behind us here but I can’t speak to that other than to say that consider several attorneys resigning ought to speak greatly to the particular aspects of the case.
Okay. And then finally just – you’ve set us dollar EPS target out there for 2020. So the most recent quarters, I mean we’ve seen some moderate leverage but in order to hit that dollar and duly accelerate the leverage, so I guess the question would be what is that half of a dollar work like? I mean at this point I guess I got to believe it’s more of a hockey stick effect where you’re going to get us by the leverage from the short-term but then in the outer years it would some pretty dramatic leverage. I mean is that the right way to look at it?
I started to think so; I think I’ve tried to convey that the operating profits of this company – if we were wish to accelerate those, of course, this year they are accelerating quite dramatically anyway from our shelter right except expenses that we’ve put in last year on purpose to bring those new products to market. But whether businesses starts with about 90% gross profit margins even if you’re investing heavily in sales force assets, research and development assets, you still overtime as those assets begin to mature should see rapid increase in EBITDA, adjusted EBITDA and operating profits. And we’re very confident in next year, year after and so on and seeing our operating profits and adjusted EBITDA increase dramatically. So we’re not wavering on those goals set for 2020.
Okay. And I guess just as a follow-up on that – this accelerated trials, I mean if the R&D level were to go up by a couple of points, I mean I would assume that that that might mean that that dollar gets pushed out a little bit; is that the right way to look at it?
Well, I think understand we currently have 30 studies going on all over the U.S., almost 200 physicians involved and I forget how many sites. So our R&D is going to go up a bit but it’s not going to go up 2%, 3%; it’s going to go up probably less than 1% because we’d be transitioning these adhoc studies we’ve been doing into more focused IND BLA studies. So we’re very engaged and I’ve got a quite an effective staff in terms of MD’s, nurses, other clinicians associated with keeping these studies moving. So we’ll be just transitioning from some other adhoc studies. These two studies we’re talking about having results on a good and getting published this year on VFU and VLU. Those have been very expensive studies and relatively speaking for us and have taken a lot of time, those will be completed by mid-year here. Those assets will be moved into these BLA-IND-BLA study. So it is not going to be this huge also in one year 3% jump in R&D expenses here.
Yes, and I mentioned too that it’s short to medium term. I think by the time we get out to 2020, a lot of those that will kind of normalize as well. And plus some of these studies we’re looking at – actually we’ve got some experience with our Ortho-Flow trials in the knee that we can actually enroll these trials very, very quickly. So much more quickly than we have in our previous larger scale studies. So that holds true as we expected to and we’ll be able to move to them quite rapidly. Mike, just from a modeling perspective, that dollar in adjusted earnings assumes fully loaded R&D programs. So we’re not increasing the amount of those programs, some of that might just be pulled forward. So it’s just how they run through the years but the dollar amount stay the same, I’m out through that period.
Okay, that was helpful. Thanks a lot.
Thank you. Our next question comes from Matt Hewitt from Craig-Hallum. Your line is open.
Good morning. Congratulations to the strong start of the year. A couple of questions, first on the gross margins – I want to go back to that a little bit, so – and thank you for the explanation as far as how the AvKare transition to your own supply schedule is going to help but that was an area gross margin where with some of the new products and some of the new markets, you wouldn’t dissipated that trending down a touch going forward maybe, 86% to 87%; is that still your kind of your long-term or short to medium term target or do you believe the Q1 rate of 88% is sustainable in the longer term?
I think according to our models when you look out to the 2020 projections; you are saying the takedown closer to the 86%, 87% range but that’s going to take some time and that’s making certain assumptions in terms of what the margin profile is and in the high growth area of Sports Meet [ph]. In the near-term and we put it in our guidance that we expected margins to rebound somewhat from last year and we’re still holding to that for ’17.
Okay. Secondly, maybe Pete, you could give us an update – I know there is a couple holdouts on the large insurer front; any progress with those?
There is always progress, what we want to confine to us is success and we don’t have that success yet. The hold out certainly, well – our preferences with I believe personally that these particular health plans once we publicize the VOU and the DFU studies which are multi-center – 10 or 15 multi-centers, 100 plus patients or more; once we publicize those there’s no leg to stand on in terms of not providing coverage.
Okay, fair enough. And then you mentioned there were some one-time costs that hit in the SG&A in the first quarter. How should we be thinking about that line item over the remainder year? Will that trend down a little bit here in Q2 and then get back to a normalized creep or doesn’t stay elevated because of the new hires that you completed late in the ’16 or early ’17?
Sorry, Matt, I think that my comment, that really referred more to 2016 with the stability acquisition. There was a small amount of onetime cost in ’17 but not significant.
Okay. So the Q1 rate is kind of a normalized rate and we should see a little bit of growth off of that sequentially through the year?
Yes, I mean we’re going to continue to add sales folks, I can’t say that you know typically the first quarter is a little heavier in SG&A area because of sales meeting and the like. So we expect to see continue leverage of the SG&A, as a percentage of revenue in follow-on quarters.
Okay, great thank you. And that’s it for me, thank you very much congratulations, thanks. Mike, okay, let me add that management has a pretty important commitment of eleven forty five. So if it’s a modeling question I’ve asked you to contact Mike and resolve that, if there is any other questions that [indiscernible] been number south Chris. Next question?
Thank you know our next question will come from that Matthew O’Brian [ph].
Alright, thanks for taking my questions. I’ll try to be quick. I’m sorry Pete, this is kind of a modeling question, I’m just looking at the Q2 guide. And you know it’s – it’s not – even at the midpoint not a huge increase even though that’s not what you’ve done the last couple quarters and it also has a pretty meaningful contraction in the productivity of your sales force, quarter-over-quarter which again I haven’t seen. So just curious as to why you’re looking at it that way? Is there something specifically that leads you direct, kind of conclusion or is it just a matter of conservatism?
Well we’re always going to try to be conservative but the this quarter is the last vestiges of all the administration process and procedures and headaches it’s been necessary to wind down AvKare A just this so certain sales force the focus there and sales management be focused. So we’re programming that and not us being as efficient as we could since this is the last quarter of a lot of underperforming.
Okay and then any sense for the impact of the new products drilled down and Q1 here and we should we think about that – I mean how are those things trending?
So all three of the products we’re very pleased with. Core team, it’s been about a year now almost and we’ve seen significant results in the hands of some of the providers, some of the cases are amazing quite frankly. With respect to Amnio-Fill and Ortho-Flow, we continue to make very, very good progress on the Amnio-Fill front, wounds, pressure ulcers and it spreads across all our different verticals; so everybody is trained and we’re going to head full-throttle. So that’s all very positive and of course on the [indiscernible], with the flow of front is the same, we just continue to build out our channel into the office and we’ve been very pleased with the early returns there to.
Okay, last one for me. The team management opportunity looks pretty compelling and from a couple of different areas; but you know, just the timeline that you’ve laid out for the BOA – from what we’ve seen historically seems aggressive, not saying you can’t get there but can you help handicap how impactful the pain management piece of business is going to be that your 3/1/20 forecast; i.e. if things get delayed a little bit how pushed out would some of those numbers be?
Well, let me make a quick comment. Again, we’ve tried to be conservative, we’ve got – if pain management done, blossom is fast as we think it will, we’ve got other parts of the portfolio that we feel are going to be stronger than we’ve laid out. So again, we’re not – management will let you know very quickly if it looks like that particular goal is too optimistic. But we laid the groundwork Matt, we’re going to continue to be in the elective pay world for the next year and a half or so, continue to capitalize on the Phase 2b study as that data comes out this summer on the [indiscernible]; that will reinforce the studies that were already done. And so that’s going to give us a little bit of a jump start.
Again, as we build out the channel will build out more and more momentum there and I think what we’ve learned anecdotally through the last five years or so that our both our Amnio-Fix and then also recently with Ortho-Flow and the Amniotic-Fluid, we feel very good about the dosing and what we’ve learned so far with those results; so that all should go very favorably toward the studies and accelerate them.
So if pain management got pushed out by two years will that dollar turn into $0.80 or would it be even closer to the dollar?
Thought I’d give it a shot. Thank you.
Thank you. And that does conclude our question-and-answer session for today’s conference. I would now like to turn the conference back over to Mr. Petit for any closing remarks.
Well, thank you very much. We appreciate you joining us for this hour and fifteen minutes, I hope that it’s been productive, and I hope that you’ve taken away from it management’s enthusiasm for what we’ve got ahead. Check whether this is necessary, thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.
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