MiMedx (MDXG) is a processor, marketer, and distributor of human amniotic tissue. Through its "Give the Gift of Healing" program, MiMedx obtains amniotic membrane tissue that would otherwise be discarded. The program allows for mothers, who deliver healthy babies by Cesarean section, to donate the placentas. MiMedx then employs exclusive technology known as the Purion Process, which allows the amniotic tissue to be dehydrated and sterilized. This process allows for an easy to use graft that can be stored at room temperature and has a five-year shelf life. These allografts have proven to be a facilitator of wound healing and are being used to heal lower extremity ulcers, to treat burn victims, and in many other surgical applications. MiMedx holds exclusive rights to eight issued and 33 pending United States and foreign patent applications for this technology. MiMedx products go by the brand names of AminoFix and EpiFix.
Treatment of Diabetic Foot Ulcers
The American Diabetes Association reports that 25.8 million children and adults in the United States, or 8.3% of the population, have diabetes. The World Health Organization reports that 347 million people worldwide have diabetes. It is safe to say that diabetes has reached epidemic proportions.
On November 19, 2013, Wound Medicine, a respected medical journal published an paper titled "Dehydrated Human Amnion/Chorion Membrane Allografts in patients with Chronic Diabetic Foot Ulcers: A Long Term Follow-up Study." The authors examined eighteen patients who had previously completed a randomized controlled trial using EpiFix to treat for diabetic foot ulcers. The patients were examined nine to twelve months after wound closure with EpiFix. Of the eighteen patients, only one had recurring problems with diabetic foot ulcers; 94.4% of the patients remained completely healed.
According to the American Podiatric Medical Association, approximately 15% of patients with diabetes will develop foot ulcers. Doing some simple math, we see that over 52 million people worldwide could benefit from the technology that MiMedx has developed. This alone sounds like a tremendous opportunity for MiMedx.
CMS Reimbursement Decision Leads to Competitive Advantage for MiMedx
There are competitors in this space; more specifically: Shire Pharmaceuticals (SHPG), Organogenesis, which is a privately held company, and Osiris (OSIR). Shire Pharmaceuticals offers a product called Dermagraft, Organogenesis offers a product called Apligraf, and Osiris offers a product called Grafix. At first blush, three other pharmaceutical players offering a similar product seems a bit crowded but a recent decision by the Centers for Medicare and Medicaid Services [CMS] has given MiMedx a significant competitive advantage over both Shire Pharmaceuticals and Organogenesis and recent studies indicate that MiMedx grafts are simply better than those offered by all three competitors (More on that later).
First a little foreshadowing of the CMS decision: one advantage that MiMedx has over its competitors is that there is relatively no medical waste involved in the use of its products for the treatment of diabetic foot ulcers. This is because MiMedx is able to manufacture grafts in various sizes as small as 1.5 square centimeters. This compared to Dermagraft, which is only offered at 37.5 square centimeters, and Apligraf, which is only offered at 44 square centimeters. Considering the fact that diabetic foot ulcers have a median size of 1.3 square centimeters and all of the above grafting products are single-use only products, you can see that approximately 80% of MiMedx competitor's products are discarded and end up as medical waste. MiMedx estimates 100 million of Medicare and Medicaid reimbursed dollars per year are wasted in this manner.
Which brings us to the CMS decision. On November 27, 2013, CMS announced that it will package the reimbursement for advanced wound care products with the related surgical procedure into a two-tier payment system. This basically means that CMS will reimburse one set amount for the doctor's activities and one set amount for the cost of the graft. For diabetic foot ulcers and similar wounds smaller than 100 square centimeters, reimbursement will be $409.41, and for larger wounds it will be $1,371.19. Considering that the MiMedx small Epifix graft costs $300 vs. the competition's "one size fits all" grafts for $1,600 and $1,700 respectively, we can clearly see an immediate competitive advantage for MiMedx.
On the Q3 2013 conference call, Bill Taylor, President and COO of MiMedx succinctly described the potential of this decision:
Now there are several ways to model the EpiFix chronic wound market opportunity. I'll take a very basic approach for DFUs first. If you look at the 1 million DFUs in the U.S. annually and then use the breakdown from the recent publication in the Journal of Wounds that came in July, according to that publication, 50% of these are 1.35 sq.cm or less, so they can be treated with our $300 disc. Assuming it takes 2.5 applications on average to close a wound, that would be 500,000 wounds times $300 per disc x2.5 applications which ends up being a $375 million addressable market. Then you take the next 27% of the wounds that are between 1.35 sq.cm and 5 sq.cm, and then you use our 2 x 3 graft or 6 sq. cm graft, assuming it needs three applications to close that wound, using on average 2 of the 2 x 3s and one disc, you will use the one disc on the third application because the wound gets smaller, that's two EpiFix at $1,200 each and one at $300, x270,000 wounds which equates to about $730 million in market opportunity. Then next you take the 16% of the wounds that are between 5 sq. cm and 20 sq. cm.
Conservatively, assume that also it only takes three applications to close a wound, and it uses a combination of our 4 x 4s or 16 sq. cm grafts and our 2 x 3s over those three treatments. Those wounds will then drive another $1 billion in market opportunities, a little bit above that. So, that's even without taking into consideration the wounds above 20 sq. cm. So the EpiFix specific opportunity in the DFU market alone is in excess of $2 billion....
The CMS decision provides for a competitive advantage for MiMedx and, as their Chief Operating Officer describes above, could lead to significant growth opportunities for this tiny biotech.
MiMedx Grafts Achieve Superior Results
Osiris does offer grafts in various sizes, however, on November 20, 2013 at the 10th Annual Desert Foot High Risk Diabetic Foot Conference, Dr. Matthew Regulski, Medical Director of the Wound Institute of New Jersey presented clinical trial data on Grafix use on DFU's. The clinical trials demonstrated 62% of patients receiving Grafix had complete wound closure.
MiMedx Epifix product simply outperforms Grafix, as 94.4% of patients who received MiMedx Epifix as treatment for their DFU's experienced lasting and complete wound closure.
With regard to its other competitors, Shire Pharmaceuticals and Organogenesis products, Pete Petit, CEO of MiMedx said it best:
Our grafts have shown to be significantly more clinically effective that the Apligraf and Dermagraft products. Comparing publications associated with clinical results of those two products and publications on EpiFix, we're showing healing rates of 40% to 60% higher than those products.
The Medtronic Distribution Deal
As if the superior DFU product and favorable reimbursement polices were not enough to get investors excited about MiMedx, let me point out the fact that the use of MiMedx Purion processed allograft products extends well beyond treatment for DFU.
Recently, MiMedx entered into a distribution agreement with Medtronic (NYSE: MDT). For those of you not familiar with Medtronic, they have a market cap of $57 billion and are a worldwide leader in medical device technology and therapies. At last check, Medtronic had $16.5 billion in net sales revenue. Per the agreement, MiMedx will provide Purion processed allograft products to Medtronic for use in spinal applications in the spinal surgery market. The spine business segment accounts for $3.1 billion of Medtronic's sales revenue and Medtronic commands almost 40% of the spinal device market share in the U.S.
MiMedx has a market cap of $616 million and, at last check, had total revenue of $51 million. The $3.1 billion spine business segment of Medtronic is 60x the total revenue of MiMedx. This distribution agreement could be a monumental growth catalyst for MiMedx, and should speak volumes to investors as to the validity of MiMedx technology.
Fundamentals:
With a forward PE ratio of 78.75 and quarterly revenue growth of 102.6%, MiMedx stock is not expensive; especially when you consider the CMS decision's potential positive impact on market share and earnings along with the upside potential of the Medtronic distribution agreement, which was not attributable to their most recent quarter as it had not been signed yet.
MiMedx gross margins have exceeded 80% for the last three quarters and they have recently turned cash flow positive. They have a clean balance sheet with $6 million in cash and $0 debt and management has been executing - meeting or beating revenue guidance for eight consecutive quarters. The company is 22% held by insiders, which is an indication that management will be concerned about shareholders.
With all of the above catalysts, MiMedx could be on the brink of turning earnings positive, which will get the attention of the institutional funds that are prohibited from investing in biotech companies until they report positive earnings.
Potential Headwind
As with any investment, MiMedx does offer investors some risk. On September 4, 2013, MiMedx announced that it had received an "untitled letter" from the FDA regarding the proper regulatory pathway for the company's micronized product line. The FDA was basically saying that by manipulating the micronized product, MiMedx might no longer be able to distribute it without FDA approval.
Since the letter became public, MiMedx has repeatedly stated that the micronized product line only accounts for 15% of the company's projected 2014 revenues and that they believe they would still meet estimates even without the micronized product. Most importantly, EpiFix is not affected in any way by this letter from the FDA.
MiMedx met with the FDA on October 28, 2013 and presented information in support of their micronized product meeting the standards of the Public Health Services Act Section 361, and FDA regulation 21 CFR 1271. The FDA said that they would consider the new information and respond in a timely manner.
This pending decision by the FDA has been an overhang on the stock price which is presenting an opportunity for investors. However, should the FDA decide MiMedx's micronized product must clear a regulatory pathway through the FDA, the short term effect on the stock price would likely be negative.
Conclusion:
MiMedx is offering a superior product with significant potential. Recent reimbursement decisions by Medicare and Medicaid are favorable to MiMedx and should lead to gains in market share and revenue growth. The recent distribution agreement with Medtronic has significant upside potential for MiMedx to turn earnings positive, and MiMedx is a fundamentally sound, if not cheap, company at its current stock price. All of these positive catalysts should outweigh the short term risks involved in the pending FDA decision.
Disclosure: I am long MDXG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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