MiMedx Group Inc

NASDAQ:MDXG

Earnings Call Analysis

MiMedx Q3 Report: Strong Growth and New Ventures

In Q3, MiMedx saw year-over-year net sales surge by 21% to $81.7 million, with gross margins at 82% and adjusted EBITDA soaring to $17.6 million, marking 21.6% of sales. The company's cash position improved by $12.5 million, totaling $81.2 million. They launched EPIEFFECT, a new product for private office customers, and announced a collaboration with Redmond. Hospital and private office segments grew by 18% and 17% respectively, benefiting from product expansion and investment in clinical research. MiMedx is exploring market expansion strategies, including potential inorganic growth that aligns culturally and strategically.

Consistent Revenue Growth and Profitability Commitments

The company has showcased a notable performance, marking the third consecutive quarter of revenue growth surpassing 20%. This consistent top-line performance indicates a clear execution of strategic plans and foreshadows sustainable future growth. Furthermore, the company has delivered on its promise for greater profitability, achieving an adjusted EBITDA margin above 20% for the second half of 2023, signifying its proficiency in scaling the business efficiently.

Sector-Specific Sales Developments

The hospital sector experienced a healthy 18% increase in sales, credited to the introduction of new products. In the private office segment, there was a 17% growth in sales, though it faced some headwinds due to confusion regarding Medicare policy changes. Nonetheless, this demonstrates the company's ability to grow within different sector dynamics.

Innovation and Market Expansion

The company has successfully expanded its Wound care solutions product portfolio with the addition of EPIEFFECT, now listed on the Medicare ASP, which is set for a full-scale commercial launch. Commitment to organic product development and innovation is key to maintaining market leadership and propelling future growth. Moreover, efforts are being made to develop the Japanese market, which despite longer lead times, presents a significant opportunity.

Strategic Portfolio Diversification

With an eye on market-driven strategies, the company considers broadening its skin substitute portfolio to include non-amniotic products such as Xenografts or synthetics. This approach aims to open market segments currently inaccessible, promising to complement and leverage existing commercial resources for accelerated growth. Any potential strategic acquisitions are meticulously evaluated to ensure they mesh well culturally and strategically with the existing business and contribute to hastening the growth trajectory.

Financial Strength and Outlook

Financially, the company is robust, ending the quarter with over $81 million in cash. The recent collaboration and product launch activities are expected to consistently raise company performance. Revenue growth outlook is revised to be in the high teens, nearing 20%, with the anticipation of maintaining a 20% adjusted EBITDA margin in the latter part of 2023. The company's financial posture is also companied by cash reserves expected to be over $80 million by year's end and all other indications point towards double-digit revenue growth for the foreseeable future.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, and thank you for standing by. Welcome to MiMedx Third Quarter '23 Operating and Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Matt Notarianni, Head of Investor Relations for MiMedx. Thank you. You may begin.

[Matthew Notarianni, executive]

Thank you, operator, and good afternoon, everyone. Welcome to the MiMedx Third Quarter 2023 Operating and Financial Results Conference Call. With me on today's call are Chief Executive Officer, Joe Capper; and Chief Financial Officer, Doug Rice. As part of today's webcast, we are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations website at mimedx.com.

Joe will kick us off with some opening remarks, and Doug will provide a summary of our operating highlights and financial results for the quarter, and then Joe will conclude with some additional updates, including a discussion of our financial goals. We will then be available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements, including statements regarding future sales, EBITDA, free cash flow and cash balance.

Future margins and expenses and expected market sizes for our products. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual results and market sizes will depend on a number of factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays and other factors.

Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our annual report on Form 10-K and our quarterly reports on Form 10-Q. Also, our comments today include non-GAAP financial measures, which we provide a reconciliation to GAAP measures in our press release, which is available on our website at mimedx.com. With that, I'm now pleased to turn the call over to Joe Capper. Joe?

[Joseph Capper, executive]

Thanks, Matt, and good afternoon, everyone. Thank you all for joining us on today's call. It is my pleasure to report on another excellent quarter. As you will hear today, the company is executing across the board, commercially, operationally and financially. In addition to delivering outstanding results for the period, we continue to improve the operational effectiveness of the company and prepared for the launch of another new product. I will detail these positive developments one by one, starting with our strong financial performance.

Q3 marked the third consecutive quarter during which we grew revenue by 20-plus percent. This type of consistent sales performance with above-market growth rates is a testament to the team's stellar execution and our sound strategic plan. We've also been clear in our messaging that we expect to generate greater profitability as the business grows. In fact, on our last call, we guided to an adjusted EBITDA margin of above 20% for the second half of 2023, demonstrating excellent leverage as the business scales. We are happy to report that we did indeed achieve this objective in Q3.

We have a powerful combination of highly talented individuals, innovative solutions that help people heal and industry-leading sales and operations infrastructure. Our multifaceted approach in the Wound & Surgical markets is generating the impressive results we were targeting when we repositioned the business this past summer. As importantly, the organization is well situated to continue our momentum and significant growth for the foreseeable future. More on our long-term growth plan in a minute.

First, I'd like to touch on some of the more noteworthy accomplishments from the quarter. Q3 year-over-year net sales grew by approximately 21% to $81.7 million, another outstanding growth quarter. Gross profit margin was 82% and would have been even higher but for a contractually committed last time buy of some lower-margin products. Adjusted EBITDA was $17.6 million or 21.6% of sales. up from the adjusted EBITDA of $2.4 million in Q3 of last year, representing a year-over-year increase of over $15 million.

We ended the quarter with $81.2 million in cash, up $12.5 million in the quarter. We announced the collaboration with Redmond, a global leader in Wound care, which plans to use our EpiFix product during the wool healing phase of its scars Phase III study in venous leg ulcers. And we recently announced the launch of EPIEFFECT, a new product designed to meet the expanded needs of customers in the private office segment.

I'd also point out that our efforts to streamline operations and build on our leadership position in the Wound & Surgical markets are working as designed and have helped to dramatically improve our financial profile over the last few quarters. As you will recall, this was the course we target when I arrived 9 months ago. My intent has been to create value by focusing our commercial efforts and unlocking leverage in the business as we grow. We are clearly on the right track as evidenced by the nearly 22% adjusted EBITDA margin in the third quarter.

Moving now to the company's progress on our 3 primary growth drivers. As a reminder, these are the areas in which we are concentrating our time and resources in order to best position the company for long-term success. Our highest priority is to continue to build on our leadership position in the Wound & Surgical markets by enhancing our product portfolio and expanding geographically. For the third quarter, this focus again produced growth in all sites of service.

Sales grew by about 18% over the prior year quarter in the hospital sector, which continues to benefit from our 2 new product introductions late last year. We continue to invest in clinical research and are looking to expand our medical affairs efforts, investments which are critical to support our growth in general and more specifically in the surgical suite, which is certainly a focus for the customer. In the private office segment, we grew sales by 17%. While still a help reflect this growth rate slowed a bit sequentially, likely driven by the massive amount of confusion created by the ill-fated attempt to introduce new local coverage determinations, or LCDs, for skin substitutes by 3 of the Medicare administrative contractors or MAX.

The proposed LCDs, which cover 15 states were scheduled to go into effect on October 1 and would have set an arbitrary cap of 4 outlets for applications per patient, potentially reducing levels of care. The LCDs also have dramatically restricted the number of products and companies eligible for reimbursement. Ultimately, the plan was abandoned but not before creating much confusion. We believe this uncertainty impacted ordering behavior during the quarter, as providers grapple with how they might have to modify care protocols.

Our position on this subject has been clear. We will continue to advocate in favor of changes that would level the playing field by eliminating the opportunity to gain a reimbursement system while ensuring access to products like ours that have proven to be highly effective. That said, we recently strengthened our offering in the private office setting. The newest addition to our advanced Wound care solutions product portfolio at the effect was recently added to the Medicare ASP list, clearing the way for its full commercial launch now underway.

EPIEFFECT offers a thick tri-level configuration of amnion chorion and intermediate hires with handling characteristics and product attributes that make it a preferable treatment option for deep tunneling rooms or cases or securing the graph in place with sutures to desire. We are excited to highlight this product to so many of our customers at SAWC later this week. We remain committed to organic product development and innovation of our market-leading percental drive technology as we see this as an essential element of future growth.

Speaking of best-in-class products, as I mentioned, we are pleased to be supporting MediWound, which has chosen to use our EPIEFFECT or EpiFix product in its Phase III trial for EscharEx, its next-generation agreement product now in development. According to MediWound, by incorporating market-leading and extensively studied EpiFix into its trial, it aims to maintain consistency among study subjects and optimize the potential for complete cubing throughout the study duration. It's rewarding to receive such a high-quality third-party validation of our technology.

Finally, we remain encouraged by the strides we continue to make in developing a Japanese market. Those that are familiar with launching new products in Japan, now there is typically a longer lead time to realize the potential of a product than in other geographies. However, given the large market opportunity, it is well worth the time and effort. We are encouraged by the early strides we are making and remain optimistic about the future of this business. Our next priority is to develop opportunities in adjacent markets to create additional growth drivers for the company.

As I stated on previous calls, we are evaluating ways to expand our skin substitute portfolio beyond amniotic tissue to include XenoGraft and/or synthetics. Notwithstanding the superior qualities of our placental drive allografts, this is a market-driven strategy, which will open up segments of the market where it is difficult, if not impossible, for us to compete today. We believe this approach will be highly complementary to our current business, allowing us to leverage our entire commercial infrastructure.

On the surface, this seems like an area where an inorganic effort could make sense. And given our much improved financial profile, I know many of you are excited to see us move in that direction. As applicable opportunities arise, we will give them careful consideration. To be clear, any potential inorganic target would have to, first and foremost, be an excellent cultural and strategic fit, which would accelerate our growth plan. I would also have to have a clear pathway for becoming accretive.

And finally, our last objective is to build a corporate discipline around expense management, rationalization and continuous process improvement. While we continue to exceed the goals put in place to measure our progress in this area, this objective is really more about building a culture that is focused on getting the best return from our limited resources. It has been my experience that institutionalizing this mindset early on will pay dividends in terms of gaining operating expense leverage as the business scales.

During the quarter, we made excellent progress executing against these 3 strategic objectives. Our results demonstrate that our approach is having the desired effects. We will continue to identify and execute against most relevant growth drivers for our business as we see sustained long-term performance as the best way to create tremendous value.

Before I turn the call over to Doug, I'd like to provide a few comments on the series in preferred stock repurchase we executed this past Friday. First, I would like to thank Hayfin for their past and continued support of the company. We could not ask for a better partner. As our stock started to show signs of meeting the mandatory conversion criteria, we began conversations with Hayfin about how we might help them manage an orderly transition. Ultimately, this resulted in us buying back half of their position at $6.13 and per effectively converted common share for a total of $9.5 million.

A stock repurchase at this point in the company's evolution would not typically be my highest priority for use of capital. However, this was opportunistic and made good sense since it stopped the 6% preferred dividend on the shares repurchased and was executed at a discount at a convert price of $7.70. Given the rate at which we are building cash and our much improved borrowing capacity, we do not see this as in any way impairing our ability to capitalize on strategic opportunities that may arise.

Now let me turn the call over to Doug for more detail on our financial results. Doug?

[Douglas Rice, executive]

Thank you, Joe. Good afternoon, everyone, and thanks for joining us today. I'm pleased to once again be presenting these strong quarterly results to you all today. Before diving in, I wanted to note that many of the financial measures covered in today's call are on a non-GAAP basis, so please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures.

First, as Joe mentioned, our third quarter 2023 was the third consecutive quarter in which our net sales growth exceeded 20% year-over-year despite having one fewer shipping day than the prior year period. Third quarter net sales of $81.7 million also represented modest sequential growth compared to the second quarter of 2023, which is all the more impressive given the traditional Q3 dip in health care seasonality, as well as the broad-based strength we have seen across all of our success service during the first half of the year.

The commercial team has once again executed across all of our sites of service with strong double-digit growth in each segment, despite some of the confusion Joe mentioned related to the on then of reimbursement changes during the quarter. Moving to gross profit and gross margin. Our third quarter gross profit was about $67 million, an $11 million improvement compared to $56 million last year, and our gross margin was roughly flat on a year-over-year basis at around 82%. In the third quarter, our quality operations and regulatory team continued to make progress on its yield improvement plans, which we expect will benefit us moving forward.

These efforts include the introduction of certain automation enhancements that are designed to help us realize additional scale as we grow. As Joe mentioned, gross margin was negatively impacted in the quarter by a contractual last time buy for a noncore market white-label product that we are manufacturing for a third party. This line was essentially being sold at cost, so we expect this pressure on our gross margin to subside moving forward. With that said, we remain focused on continuing to leverage our growing scale and driving our gross margin percentage back into the mid-80s over the long term.

GAAP selling, general and administrative expenses, or SG&A, was $52.6 million or 63% of net sales compared to $53.5 million or 79% of net sales in the prior year period. The decrease in SG&A, both on a dollar and relative basis was a result of our ongoing expense management, which more than offset the higher commissions we paid in the quarter due to our higher sales. Our GAAP R&D expenses were $3.2 million, a $2.8 million decrease compared to $6 million in the prior year period. This year-over-year decline in R&D spend was principally driven by the strategic realignment we announced in June of this year and the associated wind-down of the Regenerative Medicine business unit and its R&D activities.

Moving forward, we anticipate our R&D spend to generally be in the range of 3% to 4% of sales, which we believe will provide sufficient support in developing our woman surgical product pipeline. I'm also pleased to report that our investigation, restatement and related expenses were immaterial for the third quarter of 2023 as we have been able to finalize many of the matters over the last few months. We anticipate spending on these expense lines will be immaterial moving forward.

GAAP net income was $8.5 million compared to a net loss of $8.4 million in the prior year period. I share in Joe's excitement to be able to report this year-over-year improvement as a clear sign of the meaningful progress the organization has made over the last 12 months. Adjusted EBITDA was $17.6 million or 21.6% of net sales compared to an adjusted EBITDA of $2.4 million or about 3.5% of net sales in the prior year period. As a reminder, in light of our strategic realignment, we anticipate that after this quarter, we will no longer bifurcate our business on a segment basis.

Turning to our liquidity. The financial results we have posted over the last several quarters have led to strong improvement in our net cash position as the business begins generating meaningful free cash flow. At the end of Q3, the company had $81.2 million of cash, reflecting a sequential step up versus June 30 of approximately $12.5 million. With a continued focus on adjusted EBITDA generation, we believe our much improved financial profile will continue to strengthen and provide us opportunities to grow and diversify the business.

Additionally, our healthy cash flow allows us to be opportunistic in improving our balance sheet as was the case with the transaction Joe mentioned earlier regarding the $9.5 million repurchase of a portion of Hayfin Series B preferred shares. We are particularly pleased to be able to execute this transaction, utilizing less than this quarter's worth of operating cash flow generated, continuing to provide us with other options for growth funding in the future.

I will now turn the call back to Joe. Joe?

[Joseph Capper, executive]

Thanks, Doug. As you have just heard, we had another outstanding quarter, once again exceeding expectations. Quarterly revenue was up 21% year-over-year. Gross profit margin was 82%. Adjusted EBITDA was $17.6 million. We increased our cash balance to over $81 million, readied at the effect for launch and continue to realize margin improvement by driving expense rationalization throughout the organization.

For the first 3 quarters of the year, we have delivered consistently improving performance, with Q3 having our highest quarterly sales and an adjusted EBITDA margin of over 20%. As you may recall, after exceeding expectations last quarter, we raised full year guidance for revenue percentage growth to be in the mid- to high teens. Following a similar performance in Q3, we are now again raising full year revenue percentage growth outlook to be in the high teens, nearing 20%. As a reminder, sales for the fourth quarter of 2022 were by far our highest quarterly sales of 2022 at $74.4 million, naturally making it our toughest comp for the year.

That being said, given the current strength of the business and with the help of the EPIEFFECT launch, we do expect to close 2023 with another strong performance and ride that momentum into the new year. As we stated on our last call, we also expect at least a 20% adjusted EBITDA margin in the second half of 2023. And with the recent Hayfin transaction complete, we now expect to end the year with over $80 million of cash. Additionally, all fundamentals continue to point to a double-digit percentage annual revenue growth rate for the foreseeable future.

Those of you who have been following the company for the past 3 quarters have witnessed a meaningful business transformation, driven by excellent commercial execution, decisive strategic actions to reposition the company and expense reduction initiatives all resulting in a much improved financial profile for the company. I fully expect that we will continue to execute our plan, flows a year out strong and set the business up for sustained long-term growth. In closing, I would like to thank the entire MiMedx team for their outstanding performance throughout the first 3 quarters of the year.

Your enthusiasm and continued dedication to the company and to people in need of care have been a source of personal inspiration during my short tenure. I look forward to working with you as we seek to maximize the potential of this incredible company and take it to new heights. With that, I would like to open the call to questions. Operator, we are now ready for our first question. Please proceed.

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chase KnickerBocker with Craig-Hallum Group. Please proceed with your question.

[Chase Knickerbocker, analyst]

Maybe starting on the physician office segment first. Maybe a little bit of additional color on how kind of customers reacted to that LCD during the quarter. Obviously, still good growth there. Maybe talk as to why you being [ listen ] that LCD would still lead to some pausing? And then if we look at kind of what we've seen so far in Q4, have we seen kind of normal ordering behavior kind of come back now that LCD is [ sold ]? Just some additional color there.

[Joseph Capper, executive]

Yes, Chase, thank you. It's Joe. The -- yes, we saw some confusion in ordering patterns in the third quarter, in particular in the regions that were impacted in the 15 states were covered by those 3 LCDs. It was -- and we could compare that against the other MACs. So there was definitely some confusion and kind of feedback from the field was that docs were trying to figure out what they had to do, how we might have to modified care protocols to adhere to the poor application restriction. And then there was a lot of noise as to what products we were going to be covered and which ones we're not.

So we saw the impact. Good news for us is overall that site of service continued to grow at a very healthy rate. Second part of your question is what are we seeing in October so far? It looks like within those 3 MACs that order behavior starting to revert back to normal.

[Chase Knickerbocker, analyst]

Got it. That's helpful. And maybe staying on the physician office segment, if we look at kind of effect kind of growth in initial kind of launch here, do you expect it to cannibalize some Epicord and EpiFix users? Or is this going to be more de novo uptake or maybe some people who are using your products for commercial patients? Using something else for Medicare patients. How should we think about the customer set for EpiFix earlier here?

[Joseph Capper, executive]

I think earlier on -- I think about it primarily in the private office setting, and it will be used in applications that has not been used in today or used for procedure just not being used in today. So it should expand the market a bit, and then there will be some cannibalization of the EpiFix product.

[Chase Knickerbocker, analyst]

Got it. And then just last for me. I think it's fair to say that your stock may have gotten caught up in the recent GLP-1 grades as we've seen in the market lately. Maybe just some general kind of high-level thoughts there from you guys. Any sort of impact that you expect from proliferation of these drugs in the mid- to long term in the markets that you compete in?

[Joseph Capper, executive]

Yes. Chase, I think you're right, the awarded a proper, he's a bit of a crazy in the marketplace. So here's my thought on. I worked for 3 different companies that had some business in the diabetes space. And I would tell you that -- so I've been in that space -- I was in that space for almost 20 years. And I can't remember back 15, 20 years ago when we were appalled at the increase in the rate of diabetes in the United States when it surpassed 8%. And since that time, there has been numerous drugs products like continuous glucose sensors, automated insulin delivery systems, all kinds of education to help drive down the incidence of diabetes in this country.

A lot of diet products. And unfortunately, the epidemic continues to expand in the U.S. So I don't know that it's a product that's going to cure the problem. By all indications, everything that I could tell these GLP-1 drugs do work. People are losing weight with them, which is wonderful if at some point in the future. These would expand with minimal adverse effects and it had some potential impact on the rate of diabetes, that would be wonderful. Do I think it's going to happen, I would say that historical evidence would suggest otherwise.

So I think it's great. I think the more people can use these drugs if it has a weight loss impact, wonderful. So I think it's going to translate into a decrease in the rate of diabetes in the United States. I think that is a bridge too far. Evidence would suggest otherwise, but even if it did, let's talk for a second about potential impact on diabetic foot ulcer like ulcer indications for use of our product. The evidence would suggest that there is not a strong correlation between obesity and lower extremity ulcers. In fact, I think you cited this in your very thoughtful initiation that you published last week, the evidence would suggest the opposite.

In fact, these are often associated with people who have low BMI, but are just generally unhealthy, smokers, hypertension, poor diet, et cetera, et cetera. I just don't think that behavior is going to change much because we've launched a new drug. And I think Ozempic has been out since 2016, and that was the -- one of the first GLP drugs in this category. At the time it was launched, [ incentive ] diabetes was somewhere around 9.1%, 2 or 3 years after it's launched, [indiscernible] diabetes in the U.S. was at 11.3%. That was a number that was published pre-COVID. I can't imagine that code would get anything positive for that number.

So maybe it will, at some point, have an impact on the [indiscernible] diabetes in the U.S., but it certainly is not can we sell right now. So I just don't see the correlation at this point.

[Operator]

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

[Anthony Petrone, analyst]

Congrats on strong quarter year set up into 2024. Maybe I'll pivot back to the LCD, Joe, if I can, for a moment. I'm just wondering when you look at sort of the verbiage in late September, there was references to just the implementation time frame that there wasn't enough time to sort of transition practices over and that potentially could impact patient care. But you also saw just a certain amount of advocacy from the various different medical societies out there in favor of sort of taking a second look here.

So maybe just a little bit behind the scenes. What do you think was the tipping point on putting the brakes here? And as we look at the new sort of just comment period, I mean, what are the next big updates here that we should be thinking about from these local MACs and as well as other MACs that potentially may look to change their policies heading into 2024 and 2025? And then I'll have a couple of follow-ups.

[Joseph Capper, executive]

Thanks, Anthony. Well, first of all, we really don't know because they never pulled back the curtain and like why they made the decision that they made. If you're asking me for my personal opinion, I never thought it had a chance of being implemented because I thought it was arbitrary and capricious, quite frankly. And there was no good evidence to support the -- for application cap and it was -- I think [indiscernible] evidence to support the restriction on some of the products and organizations that were eliminated from participating. They asked me, I think we're maybe trying to make up for some [indiscernible] past.

But in any case, I just -- we'll never really know. I think it's probably more the upward across the industry, both clinically and from a industry that this was not a great way to approach the problem that we try to solve. And they indicated that they would continue to analyze and collect more evidence and try to see if there's a better way to approach these LCDs in the future. So as I indicated in my commentary, we continue to work with various stakeholders who have an influence on this.

We would -- we continue to advocate for policy that would eliminate some of the gamesmanship that's permitted around reimbursement of these products at the same time, maintain access for products like ours that have tremendous evidence that show effectiveness. So do I think something will change at some point in the future? Yes. Do I know what it is, absolutely not. I would say though that of all the companies in the category, we are, I believe, far and away best positioned to continue to support the private office setting regardless of the change. If it moved into some sort of a restricted utilization, we have evidence to support use of our product. if, for some reason, it moves towards a bundle, we have probably less impact than some of our other large competitors in the category.

So look, we're going to continue to support this sector. We think it makes a lot of sense. It's great access for patients that can't necessarily be treated in a hospital and it continues to grow as a result. So again, I think we're just really well positioned regardless of the outcome, but we'll continue to try to influence it.

[Anthony Petrone, analyst]

That's very helpful. And then maybe just two nuances in there. I mean, one was the advocacy and push from MiMedx that all of these products be sort of disclosed on Medicare B pricing list as opposed to wholesale acquisition cost. And then there was another decision in these LCDs where they actually wanted to limit applications to 4 for Ulcer, which was below the 10 applications previously. So maybe just on those two specifically, I mean, is there anything that MiMedx is aware up on those 2 levers versus certainly going to Medicare Part B is positive for EpiFix and other products that were included in the 58%. On the other hand, limiting the applications per Ulcer just seemed like perhaps too limiting? Is there anything on those 2 levers you can share?

[Joseph Capper, executive]

No, not really. Again, we continue to work with them and hopefully, this gets the clouds part over time, to get more clarity. We always -- we thought that the application restriction was some of our arbitrarily. It was a big point of some evidence, but it was misconstrued in the way that it's being applied. So hopefully, that goes away because that could be disruptive for patients that need more than 4 applications or they end up going into a more expensive care setting, frankly, to get treated. So it's not really good for Medicare, long term.

As far as continuing to influence the use of the ASP versus the WACC, we think that's the easiest way to go in the near term, it's kind of the low-hanging fruit. And to the credit, the CMS has been pressuring people to move in that direction. As you know, the OIG published a letter earlier in the year, pretty much directing them to adhere to these guidelines. And we have seen a lot of products move on the ASP price gaps. If you looked at the list a couple of years ago, there was maybe 12 products on the list and now it's probably up to around 75.

So the market is moving in the right direction. And quite frankly, that could be one of the reasons we performed so well in that site of service for the first 3 quarters of the year because the playing field is starting to level a bit.

[Anthony Petrone, analyst]

Last one, and I'll hop in real quick. Just on EBITDA, second half [ Q3 ] to exceed 20%. Maybe just high level, there was a restructuring program earlier this year helps in achieving that 20%. As you look forward next couple of years, how much of the EBITDA expansion will just be from organic growth as opposed to a follow-on restructuring program? Congratulations again.

[Douglas Rice, executive]

Thanks, Anthony. This is Doug. I'll take the question. We're excited exiting the year with a lot of momentum. We had a really solid Q3, we saw improved execution that will continue into Q4 and now with the new product introduction, we're going to have a lot of upside and growth. It will have a scale. We expect our gross margin staying stack up from an EBITDA perspective. We also expect to scale in sales and marketing and realize efficiencies all along our P&L.

So as our improved focus, as you mentioned, from the suspension of our BLA program that helps going into next year, we feel like we have a lot of momentum and ability to continue to grow into the double digits.

[Joseph Capper, executive]

Yes. And Anthony, the only other thing I might add is just some of those legacy expenses kind of across the board. There's focus. There's SG&A leverage. There's obviously -- you kind of get a sense of where the R&D trend line looks and then obviously not having any other ancillary pieces hitting us whether we adjust them or not should show a really nice kind of leverage P&L.

[Operator]

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

[Carl Byrnes, analyst]

Congratulations on your quarter and the progress here. I think most of my questions have been addressed. But I was a bit curious if you see an opportunity for further purchases of the Series B preferred such that it's done in an organized and orderly fashion? And then I have a follow-up to that. .

[Joseph Capper, executive]

Yes. So just a little more clarity on that. And I think I mentioned in my commentary that not my first -- not my highest priority for use of capital at this stage of the company's evolution. However, it was kind of opportunistic. We got real close to the mandatory conversion a few months ago. In fact, we were above the [ $7.07 ] mark for several days. As you may recall, requires us to stay above that for 20 out of any 30 consecutive trading days.

So it did not trigger, but it prompted us to start having conversations with Hayfin as to what is your long-term intent with the common once it converts. So they were pretty transparent that -- it's typically not the approach to hold that stock for a long period of time, and we look to probably exit it in some organized way. So it was really -- that's how the conversation has evolved. It was very opportunistic. Why we didn't buy all of it. We only bought half but, frankly, it was just to keep some dry powder because we are looking to do other things with the business.

And they also agreed to a 12-month lockup on the other half of the equity, whether converts or not. So we felt like any potential disruption as they exited the position was limited quite a bit because of our repurchase of half of it and their agreement to lock up the other half for the time being.

[Carl Byrnes, analyst]

Great. That's very helpful. And then kind of segueing to EpiFix in Japan. Do you have any updates with respect to the number of docs that have been trained to use product?

[Joseph Capper, executive]

We're well into the hundreds. I think several hundred. I think about [indiscernible] we might have put out a number of 500. It continues to grow. We're getting nice feedback from the physicians. There are -- several physicians have used the product in various procedures. They have reordered the product and they have gotten paid on the [ truck ]. All these are very important steps when you're talking about developing a new business in a new market.

I want to remind everybody that this is a first of its kind in the Japanese market. So this will take time to develop and get physicians comfortable with how to use it and as importantly, whether or not they're getting paid for it. So we're seeing pretty significant percentage growth on utilization, but off of a very low base, right? So we're pretty optimistic about what this could look like a few years down the road. But again, it's very early on.

[Operator]

Our next question comes from the line of RK with H.C. Wainwright.

[Yoon-Seo Kang, analyst]

This is RK from H.C. Wainwright. So a couple of quick questions. And looking at what the total revenues for this quarter and comparing it against last quarter, it's kind of similar numbers. And I see that the guidance you gave is higher teens. So what's the -- what's the push or pull on these numbers just on -- at a high level on the business? And also trying to see what's the probability that it will get into lower 20s based on what you're seeing?

[Joseph Capper, executive]

I think that the first part of your question was what happened from Q2 to Q3, your comment was relatively flat sequentially which is a home run for this business, right? As you know, these types of businesses typically have a seasonal decline in Q3, which we did not experience this year. On the contrary, we were able to tick the business up a little bit. We also had one less workday. So seasonal decline, one less workday and flat to up is a home run, in my opinion, in this business. .

I think the second part of your question was why would we not continue to see something in the low 20s as we move through the rest of the year and into next year. The comp for Q4 for 2022 is by far our toughest comp for the year. The revenue was clearing away the highest revenue that the business experienced last year. As you recall, that was the quarter in which we launched 2 new products in the surgical setting and revenue was somewhere around $74.5 million. So double-digit growth off of that would be a meaningful number. And we think we're well positioned to do that. We think the business will close out in the high teens, if not 20% but still a pretty good hill to climb to get those numbers.

And as you know, fourth quarter can be disruptive depending on how holidays fall, et cetera, et cetera. We think this year, we have great momentum going into the fourth quarter. Clearly, our sales organization is executing better than other organizations in the market. We have the strongest leadership team than any other company in the marketplace. So I think we're well positioned to continue to drive that momentum.

We're launching another product in EPIEFFECT into the private office segment now takes time to ramp up any new product. So that rollout will happen over the next 2, 3 quarters before we see full effect of it, but we could get a nice impact from that in Q4. So look, could we get there? Maybe. But these numbers are pretty darn good. It's pretty darn good numbers.

[Yoon-Seo Kang, analyst]

Yes. I agree with you. I was -- I'm not -- I was not negative on it. My comments are not supposed to be negative. I was actually trying to see what else is there that can actually push this higher. The other question I have is regarding seeking opportunities outside of -- just introducing another product in the fourth quarter as you have previously said and just -- and you also just made some comments on it. But in addition to that, given what you're doing in terms of trying to do this buyback and keep some powder ready. What sort of opportunities would you be looking for as you go into '24 and even into '25?

[Joseph Capper, executive]

I think you're referencing potential inorganic opportunities. As I've indicated on a couple of calls now, strategically, we have determined that expanding our skin substitute product line to include nonhuman skin subs, [ genografts ] and synthetics make a lot of sense. If we add that -- those products to our portfolio, we double our total available market just in the U.S. because, unfortunately, amniotic tissue is restricted for the use in certain market segments. So that's a priority for us at all. And it also gives us more opportunity within the hospital within the surgical suite, which is another focus area for us.

So products that allow us to move in that direction at an accelerated rate are ones that we would prioritize. And then after that, anything within the Wound care continuum that will allow us to broaden our offering, but we leverage our current operational infrastructure, both commercial and internal infrastructure. So you can imagine what those products might look like. But I think our highest priority would be the expanded skin subline.

Now I'll also tell you that there's internal developments as well, right? We continue to develop placental-derived allograft and we have a rich pipeline for those as well as potentially internal development of [ genografts ]. But we're also looking externally because as you know, that could accelerate the plan. And in my opinion, that's the only time you do acquisitions like this, it will accelerate your strategic plan. I can't just be done for the sake of doing it.

[Operator]

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

[John Vandermosten, analyst]

Thank you, and good afternoon, Doug and Matt. I wanted to understand the medical collaboration a little more. That sounds like a great opportunity to get involved in clinical trials more further proof that the FDA is recognizing a new product. Are there any other opportunities like this and with the [ Medicare ] exist, does that guarantee that your product will be used with their device, if it's approved? .

[Joseph Capper, executive]

Yes. First, yes, we were very excited about it, and we're glad to be supporting that trial. We think it's important. It's probably going to be the largest BLU trial in at least a decade, and the product looks very promising. EPIEFFECT, EpiFix was selective because it has more evidence and more around its clinical efficacy than then the other product in the category. So they know it works. They want to ensure closure throughout the trial so they get the best results. And that -- and I think they set that in their press release when they announced.

As far as other opportunities, we're always looking to work with people who have complementary products. I don't have anything to talk about today. But certainly, working with other people in and around our product category makes a lot of sense.

[John Vandermosten, analyst]

And then thinking about free cash flow, should we expect a sequential expansion in that in the fourth quarter?

[Douglas Rice, executive]

Yes. Doug. We're really pleased with where our free cash flow ended up in the quarter, sequentially an increase versus our Q2 $7 million, I would expect Q4 to look similar. I think there's a lot of puts and takes in Q4, but we signaled in our prepared remarks that we expected adjusted EBITDA to be north of 20%. That's what it was in Q3. We would expect the same in Q4, and I would expect that our free cash flow would look somewhere.

[John Vandermosten, analyst]

And I want to expand on the earlier analyst question about EPIEFFECT. Do you feel that having more products in the Wound product portfolio will actually provide some kind of synergistic benefit there? Or might there be cannibalization in the group of our product?

[Joseph Capper, executive]

Yes. I think a little bit of both. Clearly, EPIEFFECT can be used in other procedures, which we talked about specifically when suturing is required. So it's going to expand utilization. But the -- frankly, there might be some cannibalization of EpiFix as well.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Joe for closing remarks.

[Joseph Capper, executive]

Thanks, operator. And thanks for your questions and for your continued interest and support in the company. That concludes today's call, and we will talk to you after our next quarterly report. Thank you.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.