MiMedx — Management Miscommunication Skews Valuation Down and Creates Great Buying Opportunity

Investment Thesis

Overall, what makes MDXG a good buying opportunity right now is a combination of two factors.

• Number one is management’s miscommunication with the market. The market currently believes that wound care is the core business of MDXG, is not entirely aware of the potential of its biopharma pipeline and more specifically its Amniofix drug, and has priced the company based on this.
• Number two is the huge potential of the Amniofix treatment and its ability to become the next blockbuster in the healthcare space after the conclusion of its phase 3 trial.

Idea Summary

MiMedx Group (MDXG) is a leading BioPharma and wound care business whose value has been drastically misunderstood by the market. Through drivers such as miscommunication from management about the company’s valued proposition as well as the lack of institutional investor coverage, the market currently believes that the majority of the company’s value sits in its low growth wound care business. In reality, its major competitive advantage is within its osteoarthritis drug Amniofix which has the potential to become the next blockbuster after it clears phase III clinical trials. A sum of the parts valuation was used to determine a minimum implied upside of at least 300%. Risks are discussed at the end.

Business Overview

MiMedx Group is a leading biopharma and advanced wound care business utilizing human placental tissues to develop products used in the healthcare sector. It processes placental tissues using its patented processes to produce allografts, which are tissues transplanted from one person to another for wound care and regeneration. These allografts are effective in healing difficult wounds because of the ability of the allograft cells to quickly associate with the cells of the patient, thereby taking part in the healing process, easing the ability of the body to close the wound, and speeding up the body’s regeneration process.

MDXG’s product offerings can be split into two business segments: wound care and biopharma (surgical solutions). Its flagship product Epifix and additional product Epicord fall under its wound care umbrella, and its flagship product Amniofix as well as additional products Amniocord, Amniofill, and Epiburn fall under its biopharma umbrella. The wound care products service the broad wound care industry, targeting specifically chronic wounds. The biopharma product line is more specific, with the flagship treatment Amniofix targeting knee osteoarthritis in specific.

MDXG sells through direct sales, sales agents, and distributors in the United States. This past quarter, 95% of its sales were direct to customers such as healthcare professionals and facilities.

Internal Analysis

The past 3 years have not been ideal for MDXG. Its revenues began to dip in 2018 around the time of their accounting scandal, the growth went from 40% in 2018, to 11% in 2019, and is currently around -16%. This sent their stock price tumbling from $16 USD to lows of almost $1 USD, though it is currently trading at $9 with new updates on their biopharma pipeline.

Their gross margin has stayed very high, around 80% while their EBITDA margins have dropped over the years. Though it wasn’t explicitly disclosed, a large part of this drop in EBITDA margins has been attributed to a temporary increase in legal fees due to the litigation MDXG has faced this past year. Its decreased volume may have also suppressed margins as the number of wound care treatments in hospitals significantly dropped during COVID-19.

The company’s cash balance is sitting at a very high level of 84 mm. This is in large part due to its recent capital raise, which happened to be strongly criticized by one of MDXG’s activist investors, Prescience Point Capital (discussed in detail later).

External Analysis

Wound Care Market

The global wound care market is expected to grow at a CAGR of 4.1% from 2021 to 2028. This has been driven by the aging population and rising rates of chronic diseases such as diabetes and cancer. Wound care products are increasingly being used to prevent and surgical site infections.

Though the overall market is projected to grow at a CAGR of 4.1% the specific advanced product segment which includes products such as those of MDXG’s which target chronic and non-healing wounds, is projected to grow much faster than 4.1%.

The wound care market is relatively fragmented, with large players such as Integra LifeSciences, 3M, Johnson & Johnson, and Medtronic competing to gain the most market share. MDXG’s direct competition for its allograft advanced wound care treatments include Organogenesis, Axogen, Mediwound, and Vericel.

Organogenesis is currently in the lead in this niche market, and while MDXG reported an 11% YoY decline in sales in 2020 (which has already been factored into the current price), Organogenesis reported a 30% increase. This is evident when comparing the stock performance of both companies over the past year (figure 1)

Osteoarthritis Therapy Market

91 million U.S. adults have arthritis, 20M have knee OA, and ~32 million per year are currently treated for plantar fasciitis, which is specifically targeted by MDXG’s Amniofix drug. There are very few FDA approved treatments for knee OA and plantar fasciitis, and those that exist have low efficacy and many drawbacks. Amniofix is currently the only treatment of its nature in phase 3 clinical trials that have posted very positive results in both company and independent trials, has been used off-label by >100K patients with zero severe adverse effects, and consistently demonstrates a significant reduction in pain as reported by patients. In addition, Amniofix has an RMAT (regenerative medicine advanced therapy) designation granted by the FDA which allows for MDXG to benefit from an expedited approval process from the FDA.

Investment Thesis

Overall, what makes MDXG a good buying opportunity right now is a combination of two factors.

• Number one is management’s miscommunication with the market. The market currently believes that wound care is the core business of MDXG, is not entirely aware of the potential of its biopharma pipeline and more specifically its Amniofix drug, and has priced the company based on this.
• Number two is the huge potential of the Amniofix treatment and its ability to become the next blockbuster in the healthcare space after the conclusion of its phase 3 trial.

Management Miscommunication

The current market opinion of MDXG has been blurred by the miscommunication from company management whose goals do not align with maximizing shareholder value. This is largely due to the fact that EW healthcare, a private equity firm, has 33% representation on the board as a result of its 17% stake. From a corporate finance perspective, a private equity firm’s interests do not generally tend to align with those of public shareholders. Their influence has been exacerbated by the fact that there are no large institutional holdings in MDXG as of yet other than Prescience Point, and there has been minimal coverage on the stock leading to the market’s opinion on the company being heavily skewed by management communications.

MDXG’s current growth strategy is focused on roll-ups in the wound care space. This is very characteristic of a private equity playbook, and goes alongside EW’s historical acquisitions. As was mentioned in the external analysis, the wound care space is growing at a slow rate of ~4.1%, however MDXG has lost significant market share to Organogenesis. Management has failed to realize that the current value driver of the business is within its biopharma line and not its wound care line, yet has continually communicated to shareholders that it believes it is in fact wound care and it is going to continue investing in growing within the industry.

Prescience Point Capital, an activist investor group which has advocated for change in MDXG’s communication strategy, has supported the fact that MDXG’s communications have been focused on the wrong industry. At the JP Morgan Healthcare Conference, the potential for the drug Amniofix was drastically undersold and much time was spent convincing investors that the core business is in wound care. The 3.6% decline in shares two days after the conference illustrates how effective this strategy was.

There has been strong opposition from MDXG’s board of directors to Prescience Point’s activist efforts. In a shareholder letter in early May, prior to their annual meeting, the company communicated that they believe the wound care and regenerative medicine direction being followed now is ideal. They stated that the activist investor does not understand pharmaceutical company disclosure and were advocating for speculative actions themselves though Prescience’s report discusses the opposite, with them outlining how EW’s influence on the board of directors is shifting the company’s focus away from maximizing shareholder value.

Amniofix

As mentioned in the external analysis, there is currently no other treatment, either in development or on the market, as effective as Amniofix in treating knee OA and also just as safe. Most recently, at its Q1 earnings call, MDXG CEO shared positive results from the phase IIb prospective trial of the treatment. There was a statistically significant reduction in VAS (visual analog score) for pain and an improvement in the foot function index score. There were also no serious adverse events during this clinical trial. Amniofix is currently in phase III trials, and MDXG believes they are on target to meet all criteria needed to find a biologics license application (BLA) so that the treatment can be introduced to the general public. MDXG is aiming to file their BLA in the first half of 2022, meaning that within a year this blockbuster treatment could be on the market, and given the feedback so far from clinical trials as well as the RMAT designation, it is highly likely.

A Prescience Point market capture analysis estimated that the treatment would bring in $4,050 million of annual sales. This is ~8 times higher than the current sales brought in through wound care. One year ago it would have been prudent to not entirely incorporate this into the share price, however today with clinical trials nearing completion and MDXG’s new RMAT designation, the likelihood of approval is much higher.

Valuation

From a valuation point of view, a quick sum of the parts analysis is the most ideal given the two different business lines of MDXG. A more in-depth DCF can be created once more cost information is provided from MDXG after the conclusion of clinical trials.

Shares outstanding of 109.8 mm, total debt of 51.8 mm, and total cash of 84.7mm were used to convert from enterprise value to equity value. The current implied upside was calculated using the current price of $9.46.

Wound Care Valuation

MDXG’s FY 2021 sales guidance assumed $255 mm to $270 mm in revenue from the wound care segment. Different points in this revenue ranged were used for the low, base, and high cases of the valuation. An EV/Revenue multiple was used to calculate implied enterprise value. The comparables analysis shown in figure 2 illustrated the median multiples derived from the analysis done using the aforementioned list of MDXG’s competitors. A median multiple of 5.3x was used. The median was used and not marked down because the gross margin and UFCF yield of MDXG is in-line with all competitors. Though the EBIDTA multiple was lower, the similar yield and gross margins indicate that company performance is relatively the same. In addition, litigation expenses factored into the lower EBIDTA multiples and thus it is not indicative of recurring performance.

Based on the revenue multiples, implied share values for the wound care segment range between $12.0 and $12.8.

Wound Care Equity Value

Biopharma Valuation

Prescience Point estimated annual revenues from Amniofix through using the market capture method. The total market size (annual knee OA injections) was estimated, and a capture percentage was applied to determine the annual number of patients receiving the Amniofix injection. Prescience assumed 1.5 injections per year but to be more conservative in this valuation 1 was used. Price per injection and FDA approval probability varied by the cases and were used to adjust the EV/Rev multiple downwards. Overall, an implied share value range between $25.4 and $57.1 was calculated for this segment.

Biopharma Equity Value

Overall, the total implied share price ranges between $37.43 to $69.81. As more information regarding Amniofix comes out including the price of manufacturing, different multiples can be used to fine-tune the analysis.

Risks

1. Given the high influence EW healthcare has on the board of directors, there is potential for more value to describe acquisitions such as that of stability biologics, which was bought for 10 million and sold for 3.5 million 3 years later. If such a trend continues, the value of MDXG’s wound care business can dramatically decrease, which will hurt the share pierce
2. The FDA approval of Amniofix is a large driver of the valuation calculated. There is a large risk that the FDA will not approve the treatment, however, with the RMAT designation in place and positive results from the first two phases of clinical trials, the odds are strongly in the favour of the approval at the current point in time.

Overall MDXG has been strongly misrepresented by management leading to a skewed opinion and pricing by the market. Would love to hear your thoughts and whether or not you agree with this analysis below!

The original investment write up can be found on Utradea, a social platform for investment ideas and insights. Check out the post by Gchahal8 and follow him for more great investment content and stock analysis