Misonix, Inc.
Q2 2021 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good day, and welcome to the Misonix Second Quarter Fiscal Year 2021 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead.

[Norberto Aja:]

Thank you, operator, and good afternoon, everyone. Thank you for joining the Misonix fiscal 2021 second quarter conference call. We’ll get started in just a minute with management’s comments and your questions. But before doing so, let me take a minute to read the safe harbor language. Today’s call and webcast contain forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995 and can be identified by words such as anticipate, believe, estimate, expect, future, likely, may, should, will and other similar references to future periods. Examples of forward-looking statements include statements regarding guidance and relating to our financial results. Forward-looking statements are neither historical facts nor assurance of future performance. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances.

[Stavros Vizirgianakis:]

Thank you, Norberto, and good afternoon, everyone. Thank you for joining us on the call today to review our second quarter results. Joining me on the call today is also Joe Dwyer, our Chief Financial Officer. Our results for fiscal second quarter demonstrates Misonix’s resiliency in what has been a difficult environment due to the ongoing impact of COVID-19 on our business and much of the health care industry as a whole. We have navigated these temporary challenges exceptionally well by taking meaningful measures early on in the pandemic to reduce operating expenses, strengthen our financial flexibility and adjust our mid to long-term strategy so that we consider these non-secular trends. As a result, Misonix reported sequential quarter-over-quarter growth in total revenue and significantly improved profitability. At the same time, we have made many tough yet constructive and strategic decisions so that we’re in the strongest possible position to drive market share gains and further adoption of our surgical and regenerative products as we and health care providers emerge from the challenges of the pandemic. Let me begin by providing an update on our business and strategy before handing the call over to Joe to review the financial results and the significant work he and his team have done to improve the financial side of our business. Taking a look at our wound business, we estimate that as many as 30% of patients being treated in wound care centers have been forced to postpone or delay treatment. These temporary closures, combined with unprecedented constraints on hospitals, have been driving patients to alternative sites of care. As a result, we continue to see a migration, albeit a temporary one in our view, towards physician offices, an area that is not a priority for us.

[Joe Dwyer:]

Thanks, Stavros, and good afternoon, everyone. Starting with top line performance. Second quarter revenue decreased 7.4% to $18.3 million compared with $19.7 million in the second quarter of 2020, reflecting the ongoing headwinds brought on by COVID-19. As Stavros mentioned, we’re pleased with the progress and the direction of our revenue since the onset of the pandemic. We’re hopeful that the trend will continue to show improvement as the pandemic begins to slow.

[Operator:]

Thank you. And we’ll take our first question from Alex Nowak with Craig-Hallum Capital Group.

[Alex Nowak:]

Great. Good afternoon, everyone. Maybe to start, could you expand on the strength that you’re seeing in the surgical market? The growth there, obviously, well above the market. So is it coming from the Nexus placements? Is it coming from the launch of new products, particularly in the neuro segment? Or is this just continued penetration in spine with BoneScalpel?

[Stavros Vizirgianakis:]

Thanks, Alex. Thanks for the question. We really are seeing strength on a number of aspects when we look at the surgical business. Firstly, I think the Nexus value proposition continues to resonate well, and we continue to drive placements in a number of accounts, both existing upgrade accounts as well as competitive accounts. BoneScalpel continues to grow in terms of penetration rates and getting widespread acceptance in the spine community. And where we’ve seen particularly strong demand has been on the neuro side. So we’re confident that our strategy with Nexus is working well and the execution with the sales team is really there. Where we’ve been challenged is with overall access and the ability to launch new products. As you know, we spoke about the upcoming launch of the ultrasonic microdiscectomy procedure. And that has been delayed. And as things open up, we’ll then see the rollout of these new products in the coming months. But right now, I think the strength is Nexus platform as well as the neuro portion of it, where we’re seeing tremendous gains.

[Alex Nowak:]

No, that’s great. And maybe to go over to the wound segment, just expand on some of the dynamics taking place there. I hear you loud and clear about patients transitioning from the wound care clinic server to the physician office. But I guess, what’s the trigger to get patients to go back from the physician office and go back to the wound care clinics? And do you think this transition takes place this calendar year? Or is it going to be somewhat of a slow trickle as the centers reopen?

[Stavros Vizirgianakis:]

Difficult to see because I think a lot of the centers are open, but they are basically operating at a fairly reduced occupancy number. I think one of the positive impacts that we’re going to start seeing as more of the population gets vaccinated, I think we’ll see a lot more patients coming back to the wound centers because these are really centers of excellence. You’ve got so much expertise in these centers for managing these complex wounds. And that’s ultimately where patients want to go back. And I think once they’re vaccinated, these are generally a higher risk portion of the population. These people are, in many cases, obese. They’re suffering from diabetes and a number of other comorbidities. So I think when there’s the safety of having been vaccinated, I think, overall, their confidence level just returns, and we’ll ultimately see them coming back to the wound care centers. So we’re still pretty positive on that. We think that, that’s probably going to happen in a bigger, more significant way, probably in the second half of the year, but we’re monitoring those trends all the time.

[Alex Nowak:]

Okay. That’s understood. And maybe expand a little bit on the orthoplastics initiative. Did that product suite come from internal R&D? Or is that going to be an end licensed product? And just explain how those products fit within the overall rep’s bag in wound?

[Stavros Vizirgianakis:]

Right. So that’s really more of a surgical play in the OR. So our focus on these patients – with this patient population, what we’ve done is we’ve looked at specific opportunities. The biggest we see in Charcot foot. And if we look at the procedure today, when a physician performs these cases, you have to source hardware from one company, tissue from another company, debridement from possibly a third company. So our vision was to really put everything together. The debridement was obviously developed internally, anything to do with the ultrasonic. So whether we’re talking bone cutting or debridement. The tissue is either TheraSkin or the TheraGenesis, the bilayer. And what we’ve done is we’ve signed a distribution agreement for the orthopedic hardware. So we now have a significant range of extremity fixation products, but we are not focused on the general trauma market. We are really focusing on complementary segments, and we see Charcot foot as a very complementary segment to what we do right now. But that is the distribution agreement that we concluded.

[Alex Nowak:]

Okay. Understood. No, that’s great. And then just last question for me, just for Joe. The expenses did come in lower than what we’re thinking, pretty dramatically. So maybe what – how should we think about expenses on a go-forward basis? Is $13 million really a good reflection of the quarterly expense run rate for now? Or should we expect that to pick up a bit?

[Joe Dwyer:]

I think we’d expect it to pick up. In the quarter, we had a bad debt reversal. So that was a benefit to the quarter. So if we were at $13.3 million, I think taking that out going into the third quarter and assuming some added expenses to complete our DFU study, which will be happening in the third and the fourth quarter, you’re back probably in the $16 million, $15 million range – $16 million-ish range.

[Alex Nowak:]

Okay. Understood. Thank you. Appreciate it.

[Operator:]

And next, we’ll take a question from Kyle Rose with Canaccord.

[Kyle Rose:]

Great. Thank you for taking the question. Good afternoon, gentlemen. So I wanted to kind of – well, I guess just because Alex asked it with the orthoplastics side there. Maybe can you just – just to put a bow on that, can you help us understand, I mean, is this – are you going to stay just in the Charcot foot side? Or do you envision adding additional hardware opportunities for broader lower extremity foot and ankle hardware here?

[Stavros Vizirgianakis:]

Thanks. For the question, Kyle, I think it’s to be determined. This is our preliminary entrée into the orthoplastics market. We see this as really an emerging segment or specialty. So we think that Charcot foot is our initial entrée into this opportunity. If we’re successful in that arena, we’ll certainly look at adding in other applications and looking at other hardware opportunities. I think for the next probably 12 months, we’re squarely focused on Charcot foot because it’s so complementary to everything else that we do with the whole hub-and-spoke strategy. So short answer is to be determined. If it goes well, we’ll certainly look at expanding this. Just from a revenue perspective, I think this takes us from a legacy Misonix perspective, being able to do debridement and maybe a bit of bone cutting and having $1,000 opportunity, to then adding on tissue to having a $3,000 opportunity. Now with the hardware, it now puts us into the $12,000 to $15,000 procedural opportunity. So I think what we’re looking to do is to maximize our return on rep presence in the OR with complementary products. So we’ve gone – we thought about this, we don’t want to distract ourselves from our core business, but we also think that this could be a sort of subspecialty that can grow and exist within the Misonix sales team.

[Kyle Rose:]

Okay. That’s very helpful. I appreciate the incremental data there. When you think about the – wound care on a go-forward basis and maybe on calendar 2021, you have launched some new tissue products. You talked about TheraGenesis a little bit. I know you’ve got an amniotic product as well. How do you expect the contribution of tissue to trend over the course of calendar 2021? And when should we expect to see the new tissue products really start to drive incremental revenues?

[Stavros Vizirgianakis:]

Yes. I think with that, Kyle, we’ve complemented the portfolio pretty nicely. The problem has been trying to launch new product in a pandemic has been challenging to say the least. So I think that for the remainder of our first calendar quarter and probably up to June, we’ll be in launch mode and going through different value-add committees within hospitals and wound care centers. So I think what we’re factoring from an internal revenue perspective, is a significant revenue ramp really in the second half of calendar year. So we’re hoping that over the next five months, we can launch products on a national basis to really the full sales team and then sort out issues like reimbursement around the products and fine-tune the strategy. So that second half of the year, we can see significant contribution. Because if we just look at the opportunity in the OR for the Bilayer Wound Matrix product, that opportunity is anywhere between $150 million to probably $200 million worth of business that exists out there today with competitor products. So what we’ve seen at an early phase in the evaluation, our product is very competitive, priced very aggressively. But to launch a product in the pandemic is just challenging, to get everybody on board at the same time. I think what we’ve been aligning with our wound team is trying to get everybody to march in step and in sync. So I would say from a modeling perspective, I would start looking at a significant ramp in the second half of the year.

[Kyle Rose:]

Okay. And then just one more for me, but going back to the surgical side. I mean, obviously, the U.S. business is performing really well on the surgical side, but you do have some new product launching. You talked a little bit on the microdiscectomy side. I think you have some new handpieces as well. I mean how should we think about what those additions do to the growth rate? I mean you’re already growing 20% in the domestic surgical. Despite the pandemic, you’re launching new products. The pandemic should fade to the background, hopefully. How do we think about what that growth looks like moving forward, particularly when you’re lapping the comps?

[Stavros Vizirgianakis:]

Yes. Yes, I think to be determined. We’re in the final phases of locking in design. So the objective is right now to launch new handpieces in really the third calendar quarter of this year and the fourth calendar quarter. So the most significant one in the MIS space and then something additional on the neuro space, what we’ve seen, especially in the last quarter is a good ramp in terms of neuro handpieces. So we think that these things could help take us above the 20% level, given that things are stored in this state of flux with the pandemic, we don’t want to be overly bullish. And to your point, we’ve been fortunate to grow at the 20% level. But I think that this could further accelerate and enhance our value proposition because I think what customers are really looking for is the next level of innovation. And I think we’re bringing some specialized handpieces to facilitate MIS. If we look at where spine surgery is going, there’s more lateral approach that’s being done. There’s more MIS work. And I think these are going to be really significant products for us into the future. I think it’s just going to be a question of when we actually launch them into the marketplace, and how quickly we can scale up from a manufacturing perspective. But if we take a steady-state scenario, I think it’s not unreasonable to expect that over time, this could help push our growth rate on the surgical side north of 20% because we’ve seen that hospitals are willing to pay for handpieces. They do see the value in these handpieces. We’ve been able to manufacture and get to scale pretty quickly. So these things could help move the needle because as you get into specialty handpieces, the ASPs, start moving more towards the $20,000 mark. So you don’t have to sell a hell of a lot of them to start moving the sales number pretty significantly.

[Kyle Rose:]

Great. Thank you very much for taking the questions.

[Operator:]

Next, we’ll take a question from Ryan Zimmerman with BTIG.

[Ryan Zimmerman:]

Good afternoon. Thank you for taking the questions. So I want to ask a few follow-up from the floor, just to get a little further on the Charcot foot initiative. Stavros, I appreciate the metrics you gave around the revenue opportunities. But maybe, Joe, for you, what kind of impact will this have, given that it is a distribution agreement, on margins? Will there be some downward margin pressure as this initiative takes hold a little bit?

[Stavros Vizirgianakis:]

Yes. Thanks, Ryan. I’ll actually take that since I was involved in the distribution agreement. And I think we’ve got a couple of criteria that we look at when we look at doing a distribution deal. And the one – the thing that’s probably top and center is that we want to maintain our margins as an organization. I think we’ve worked hard to establish a 70% margin. And although it’s challenging with distribution partners, we’ve been able to have partners, see the strength and value in our distribution network. So with some haggling, we’ve been able to get to the 70% growth margin. So whether we’re talking new tissue product, like the Bilayer Wound Matrix or the extremity fixation frames, we’re able to maintain that 70% margin. So I think it goes to maybe take a little bit longer to find the right partner. Being very transparent with the partner upfront as to what we need and us not being willing to start a business unless we get certain minimum criteria and things out in the open from the beginning. So our view is if it doesn’t, at least give us the same margin. There’s no reason to distribute it unless it’s going to be a complete game changer of a product. But these are incremental products. So we think having our person in the OR and being able to offer the full range of product and really offer a procedural solution, that’s where we offer a lot of strength as an organization. And it would be difficult for others to replicate, not having the ultrasonic portion of it. So again, we’ve always said we want to leverage that ultrasonic side to it. We view things like frames being more commodity products, but these are high-value commodity products. And to an earlier point, I think it’s about establishing that relationship from the beginning. So we don’t see any drag from a margin perspective. The only thing is there’s always an investment in inventory. So it’s a couple of hundred thousand dollars or even over $1 million in some instances when you commit to these new businesses. But I think we’ve done our homework for the last year. A lot of time in the marketplace has been spent with physicians that are performing these procedures. And we feel pretty strongly that we’ll be differentiated just because of our value proposition that we’re offering that nobody else can match.

[Ryan Zimmerman:]

Right. Okay. I want to ask a few more questions on that, if I could. I mean if you think about the types of physicians that are doing – taking care of patients, wound care patients, and I guess when I think about your sales force, kind of what’s the composition in terms of the call point because some of those maybe podiatrists or foot and ankle specialists are taking care of those wound patients. Others may not be those types of physicians. And so when you boil it down, do you expect that all of your wound reps are maybe carrying the hardware and going after those patients? Or is it 1 segment of the customer base that you’re really trying to focus in on? I guess that’s the first question. And the second question is around that, when we think about kind of the tissue portfolio relative to some peers, I mean, I’d love to just get your thoughts around how you feel it backs up, given this transition to the office and what you need or may need down the line to offer that kind of full range of complementary products that can cross-sell within – across different specialties? Sorry, a lot of questions there.

[Stavros Vizirgianakis:]

A lot of detail. If I don’t answer anything, just call me out on what else do we need to answer. But I think the whole thing boils down to focus for us, Ryan. I think if we look at orthoplastics, I think this is an emerging specialty. This is not something that we see all our reps doing on day 1. So we are – we’ve got a very, very targeted approach with us. We know which physicians we’re going after, which facilities we’re going after. And we know specifically which of our sales people we’re going to use to essentially go after the segment of the market. So to augment the sales people, we’ve also hired some additional resources and we’ll continue to hire specialists that are really, really experts when it comes to management of Charcot foot and specifically in the application of frames. So these people are going to work with an elite group, for want of a better word, within our sales force. And really, some of our top performing salespeople will be the ones that get the opportunity to introduce these ranges in specific targeted accounts to specific targeted surgeons. So this is not a general approach. So if you look at products like an amniotic tissue product, for instance, that would go into the bag of every single salesperson. Whereas with orthoplastics and frames, in particular, because it’s super specialized, it’s going to go into the bags of only a select number of salespeople as well. So that’s the way that we’ve approached it just from a focus perspective because I worry, something that we’ve been pedantic about is losing focus on the core business. So this has got to enhance our business. We’re not looking to displace anybody in the extremity fixation business. This is meant to service and provide an offering that nobody can to a small subset of patients. So these are generally your surgical podiatrist. So again, a lot of podiatrists that are treating wounds are not doing advanced surgery, like Charcot foot using frames and offloading. So that’s how we’re approaching the market. In terms of the rest of the question, which relates more to the general wound portfolio, I think what we’ve learned as owners of a wound business now for more than a year, is that you need a variety of products, and you need a variety of value propositions to win in the different settings of care. So if we look at the wound care centers, I think it’s really about the coverage. And we’ve seen that, that was a shortfall, and we’ve invested heavily in the RCT, the 100-patient RCT. We’re about 86% of the way through that trial. We’ve been disrupted obviously by COVID. But we think that right now, we have two of the five major private payers that are covering TheraSkin in the wound care centers. We don’t think that there’s any reason why we shouldn’t get all of them. And when we pick up the private payers, we run and pick up the private-ensured patients, but we’ll also pick up the Medicare Advantage plans because a lot of these patients are now covered, and these insurance companies look at what their local coverage decisions are. So this impacts the acceptance of your product in the wound care center. That being said, we’ve also seen that TheraSkin is more effective on the more difficult to heal wound and the bigger wound. So we’ve had to introduce a product like an amnion for your smaller, less complex wounds. And that’s taken some time to find the right commercial partner and as we’ve done that, and we just started launching Therion, we then ran into COVID. So most wound care centers were either shutting down or saying, look, don’t bring any new products into the arena now. So we feel good that we’ve got the right product offering, the right strategy regarding reimbursement to win in the wound care centers. And similarly, in the ORs, we think that our strategy with the 1-2 punch, bundling the debridement with the tissue where people are less concerned about reimbursement because everything is under the DRG, it gives us an opportunity to really win in that arena with the two technologies together, where we’ve been slower than most to market has really been in developing a good strategy for the physician’s office. And what we’ve seen in that physician’s office setting of care, it’s not so much about the product or range of products that you’re offering, it’s more about economics for the physician. So we don’t see that as sticky business. And although we do have some business in the physician’s office arena and business has moved into that setting of care, we see that as more difficult business to maintain because unless reimbursement changes in a significant way, we’re always going to be up against a situation where on a quarterly basis, when ASPs change and WACs get reviewed, that physicians will be more inclined, the majority of them, to go for products that are simply more profitable to them and their practice than something which will give them the most optimal outcome for that specific patient. So that’s a little bit about how we approach the market and how we’ve looked at the different tissues in our portfolio. So I hope that answers your questions. If I missed anything, please, please let me know.

[Ryan Zimmerman:]

No, no, no. That was very helpful, Stavros, and it’s good to get the color around the strategy with the move into hardware. Because I think investors are going to be curious about that. Just lastly for me, and I’ll hop back in queue. But I think you did change some leadership in the wound segment, maybe around year-end. I could be wrong, but maybe just talk about kind of how that’s gone. And what the impact may or may not cause around the sales force and kind of realigning your strategy within wound? Thanks.

[Stavros Vizirgianakis:]

Yes. So I think we had made a couple of changes at the beginning of COVID to the structure of the wound care team. So we did let some people go. We had brought in some new sales managers as well. But the most significant transition was the retirement of Woody Staub. He headed up the division. And we gave our Domestic VP of Sales the opportunity to lead the whole division. So Jay Waggoner stepped in, and he’s obviously got a different approach to the business than his predecessor. We think that it’s about getting everybody in sync and focusing on the same things, not having disparate strategies. Although some of these strategies were working, I think it’s about having more uniformity in the sales team. So I think what we’ve seen is Jay brings a different level of discipline and focus to the team, which was maybe lacking in the past. So I think that for us, it’s an opportunity. There’s not significant disruption. We’ve also been opportunistic because there’s been disruption in the wound market with acquisitions and people leaving, a lot of tenured people go. So we’ve been opportunistic and also hire some additional salespeople to further bolster the wound team. So I think if you had to ask me three months ago, what my feelings were, I would have said, there’s a lot to be done. There’s still a lot to be done now. But I think we’re more confident in terms of the execution. I think everything seems to be lining up well for the next 12 months. So if we don’t do anything but execute and just launch the products that we wanted to launch over the prior six months, I think we’ve got a good runway ahead of us.

[Ryan Zimmerman:]

Thank you.

[Operator:]

Okay. And it appears that there are no further questions in queue. I’ll turn the call back over to management for any additional or closing remarks.

[Stavros Vizirgianakis:]

Thank you, operator. I’m confident that today’s call has offered further proof and brought added confidence in our strategy. The success of our work, both as it relates to our go-to-market strategy, as well as an overall improvement to the financial health and performance of the company; and in our ability to create shareholder value by leveraging the various opportunities we’re targeting. Before closing, I’d like to thank the entire team at Misonix for the incredible talent and dedication during these really challenging times as well as thank our partners and you, our shareholders, for cooperation and continued support. Thank you, everybody, for spending time with us today, and we look forward to updating you on our fiscal 2021 third quarter results later in the year. Thank you.

[Operator:]

And this concludes today’s call. We thank you for your participation. You may now disconnect.