MiMedx Group (NASDAQ:MDXG) is one of the most exciting growth stories most investors have never heard of. With its shares residing on the bulletin board, MiMedx is either off limits or off the radar of the majority of market participants. To wit, there are only 153 investors currently following MiMedx on Seeking Alpha. In comparison, an established growth story like LinkedIn (NYSE:LNKD) has accumulated 5,174 investors who receive daily updates from the site. And, as we posited last summer in our Seeking Alpha article, tracking the social interest in an early growth story can be a critical way to gauge your investment "edge" in a stock. Once a story is widely circulated in the market, you can bet the stock's earnings and growth have already been discounted in the price.
Happily, while MiMedx still trades in the undiscovered country of the OTC, an up-listing to a major exchange by the summer will certainly change all that -- as will MiMedx's sterling fundamentals. Similar to the way Uni Pixel (NASDAQ:UNXL) is taking the touch industry by storm and how LinkedIn has positioned itself as the de facto professional social networking site, so too is MiMedx establishing itself as the new gold standard of its own industry -- bioactive healing products for tissue regeneration. With its groundbreaking human tissue offerings proven to be more efficacious and cost effective than the current standard of care, MiMedx has positioned itself to become the leader in regenerative medicine.
After scaling its revenues by 250% in 2012 to $27 million and improving gross margins to 81%, MiMedx's top-tier management team is redefining execution. Perhaps more importantly, CEO Parker H. Petit and his key executives have accomplished this feat twice before, steering two healthcare companies -- Respironics (formerly RESP) and Matria Healthcare (formerly MATR) -- to their ultimate multibillion-dollar takeouts. Considering MiMedx is showcasing the type of explosive growth seen in LinkedIn (circa 2006-07), we believe the MiMedx growth story has only just begun. The next three to five years could see the company scale to $250 million to $500 million in revenues. Such growth could eventually translate into a $2.5 billion to $5 billion valuation for the company, similar to the 10-15x sales multiples the market has awarded such biotech stalwarts as Alexion (NASDAQ:ALXN) and Regeneron (NASDAQ:REGN).
Looking ahead to 2013/2014, we see 10 catalysts that should propel MiMedx to a billion-dollar valuation by next spring. This would equate to a $9 stock price, or 55% upside from current levels. Let's examine these important catalysts in further detail.
Catalyst No. 1: Investors hoping to learn more about MiMedx should listen to this past Thursday's conference call and also visit the company's redesigned website. The call was very informative and an impressive testament to managements' understanding of how this game is played. We will highlight important aspects of the call throughout this article.
As far as we see it, MiMedx's management has shrewdly chosen to low-ball 2013 guidance. This sets the stage for the company to post consistent quarters of triple-digit growth that will build an important track record of success ahead of the stock's move to a major exchange later this summer. Perhaps the most important update on the call was this: MiMedx has successfully received reimbursement from five of the nine Regional MAC Medicare intermediaries. This is significant, as it will now allow MiMedx to accelerate its direct commercial sales force roll-out, potentially leading to much better than expected growth in the second half of this year.
Catalyst No. 2: With its prospects for accelerated growth improving, MiMedx is already preparing for its future growth with a move to a new facility late this spring. This facility will dramatically expand capacity. Along with its back-up facility, which will remain open, MiMedx will now have a combined capacity of $300 million to $350 million. This new facility quietly reinforces management's bullishness on the company's long-term potential and sends a strong message to shareholders regarding the dynamic growth in store for MiMedx over the next decade.
Catalyst No. 3: In 2013, MiMedx will continue to make long-term investments in its business. In addition to scaling the commercial sales force, the company is also expanding its IT infrastructure and call-center capabilities, while also conducting numerous clinical trials for additional uses of its platform technology. These clinical trials should augment the company's prospects for gaining reimbursement rates for them. While MiMedx did not provide specific guidance on how quickly it will ramp its sales force, we can only imagine that it will continue to aggressively add new reps over the next two quarters. After growing from 50 to 162 employees last year, the company is planning to add another 100 employees this year. A good many of these will seemingly be sales reps, who will play a significant role in 2013's break-out second half and 2014.
Catalyst No. 4: Looking ahead, MiMedx was also upbeat about securing reimbursement from the remaining four regional MACS by July 1. Stay tuned here. If the company can secure reimbursement from all of the regional MACS faster than expected, this will only further accelerate MiMedx's growth prospects.
Catalyst No. 5: A move to a major exchange is forthcoming. During the call, the management team stated that they would have more specific feedback for investors on its Q1 conference call in late April. We speculate this means an up-listing will occur by the early summer. This is an important catalyst, as most institutional investors are precluded from buying into a non-listed equity. A move to either the NYSE or to the Nasdaq removes this hurdle for these institutional investors. Consider that the stock traded an average of 500,000 shares a day this past week. A move to a major exchange will further increase the liquidity in the shares, ultimately serving as an additional catalyst for a higher valuation in the coming years.
Catalyst No. 6: Gross margins continued to expand in Q4, advancing to 84%. The potential for additional gross margin improvements in the new facility seems very tangible. We believe MiMedx may eventually attain a 90% gross margin at a $25 million quarterly run-rate. Even if gross margins flatten out in the mid-80s, it will still be a highly profitable business as revenues scale above $100 million a year.
Catalyst No. 7: Consensus 2014 estimates seem too low. We feel $125 million is very doable for next year. A 9x sales valuation on these forward prospects would move the stock to our $9 price target by next spring.
Catalyst No. 8: Notwithstanding MiMedx's major investments in its business during 2013, underlying profitability should begin to manifest itself in the second half of this year. Further improvements in gross margins, along with $125 million in sales next year would move the current EPS estimates of $0.22 for 2014 to $0.35. Put a 25x multiple on these earnings and you arrive at our $9 price target.
Catalyst No. 9: A secondary offering in the second half of 2013 would allow big institutions to buy into the stock and also allow the company to buttress its balance sheet. Such a catalyst would not result in much dilution and would also increase the stock's institutional reach, allowing the shares to potentially reach our $9 price target much sooner than next spring.
Catalyst No. 10: It's a bull market. MiMedx has the potential to very quickly become even more of a market darling shortly after its up-listing. The ultimate end-game could very well be a take-out with a $1 billion+ price tag attached to it. After all, its biggest competitor, DERMAGRAFT, was taken over in 2011 for 5x sales with only one application for its technology. MiMedx has a platform technology. Not only is MiMedx gaining significant market share within the wound care market, it is also gaining share within the dental, surgical, and sports medicine markets. Additional indications also lie ahead.
Taken together, a 10x sales multiple would be more appropriate for MiMedx in any potential take-out next year. This would mean that any take-out bid would need to start with a $1.25 billion price level.
Of course, there are risks attached to investing in MiMedx. The stock is certainly very pricey and has already had a major move over the past 12 months. There is also the risk the company may not secure the additional layers of reimbursement as quickly as they are anticipating. The new sales reps may experience a longer learning curve, which would obviously curb productivity and growth.
Having noted these risks, we are highly confident MiMedx's impressive management team has already figured out how to minimize such risks from affecting its growth rate and future prospects. We are therefore very comfortable with our position in MiMedx until our $9 price objective is achieved. When it gets there, we will evaluate the company's progress and its forward prospects.
Until then, the hardest thing may very well be sitting tight with a winning position, allowing the stock to digest its recent run, and not selling out prematurely. To this end, we will conclude this piece with some very appropriate words of wisdom from Jesse Livermore, as recounted in Reminiscences of a Stock Operator:
It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine - that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.
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.