With the year winding down, Steris plc and Mimedx Group Inc. each reported restructurings. Specifically, Derby, U.K.-based Steris, which sells medical sterilization equipment and services, as well as life science research supplies, said it would consolidate its manufacturing by laying off fewer than 200 people to boost profitability. It plans to close two facilities – one in Brazil and one in England – and move production into existing locations.
For its part, the beleaguered Marietta, Ga.-based regenerative medicine company Mimedx is in the midst of having to restate its earnings after examinations by activist investors unveiled questionable sales practices. In addition to reducing its staff by 24 percent, or 240 employees, it lost auditor Ernst & Young, which had been working on the earnings restatements.
Steris said it will eliminate some products and consolidate manufacturing for others during fiscal 2020, which will start April 1, 2019. It expects to take a $45 million charge, of which $10 million will be in cash. It aims to boost profits by about $12 million annually, with half of those benefits happening during fiscal 2020 and the remainder coming in fiscal 2021.
"As a result of reduced demand for certain products and overall capacity in our global manufacturing network, we will rationalize select product offerings and consolidate manufacturing of others," said Steris President and CEO Walt Rosebrough. "We are confident that the more efficient plants in our network can absorb the volume over time, and that these actions will improve our quality, delivery and costs."
Steris (NYSE:STE) likely wants to retain its stock market momentum. It's up 36 percent year-to-date to reach a market cap exceeding $10 billion. It completed a $1.9 billion acquisition of outsourced sterilization services provider Synergy Health in late 2015 and has ramped up its performance during the roughly three years since that deal. The Synergy purchase was by far the largest of the roughly 30 acquisitions that Steris has made in the last six years, with most of them being tuck-in deals that were in the $50 million to $100 million range.
"One of the nice things that [Synergy] brought to the table is, in the U.K. and in Italy, they have really perfected the outsourced sterilization processing ability. So, what they have done is, for the NHS, or National Health Services, they do all of the washing, decontamination and sterilization of medical device instruments offsite. Typically, a hospital in the U.S. today does it within the four walls of their facilities. That's how the U.K. was doing it also until about 10 years ago," noted Steris Senior VP and CFO Michael Tokich at the Stephens Investment Conference last month.
While Steris may be aiming to enhance its upside, Mimedx is fighting for survival. In February, it became clear that the regenerative and therapeutic biologics maker was subject to a U.S. Department of Justice (DoJ) investigation of its sales and marketing practices, including undisclosed payments to doctors.
That DoJ investigation, as well as related reassessments by payers and earnings restatements required by the Securities and Exchange Commission (SEC), all stem back to short-seller Viceroy Research, which, along with similar activist investors Aurelius Value and Citron Research, started issuing reports critical of Mimedx and its sales practices in the fall of 2017. (See BioWorld MedTech, Nov. 8, 2018.)
Since early this year, its valuation has sunk steeply from about $1.8 billion to only about $325 million. Mimedx said that its shrinking revenue expectations amidst the scrutiny necessitated the shift of its cost structure. Several payers have eliminated coverage for the company's amniotic tissue products in the wake of the scandal. It expects to start seeing cost savings during the first quarter of 2019. Mimedx said it plans to focus on its traditional wound care business in the near term, alongside expanding its product pipeline and pursuing an FDA approval for micronized dehydrated human amnion/chorion membrane to treat certain musculoskeletal pain.
"Today's announcement is a continuation of management's efforts to position the business for long-term success by focusing on our wound care business, where our clinical studies best support patient outcomes and for which reimbursement policy has traditionally been more stable," said David Coles, Mimedx's interim CEO. "Recent business trends and our internal analysis have led us to simplify and streamline our organizational structure and reduce costs in order to improve profitability and liquidity."
The scandal surrounding the company led to the departures of the former CEO, COO, CFO and corporate controller "for cause." In a separate new blow to the company, external auditor Ernst & Young also just resigned in its work to restate the Mimedx 2017 and 2018 earnings. Further details are slated to be disclosed in an SEC filing by Dec. 11.
Mimedx said it promoted some executives internally, but that it remains difficult to secure a permanent CEO during an active investigation and financial restatement process. The company's audit committee is continuing its work to restate financial statements. The company said it could not estimate when it will complete its financial restatements. Last month, it was delisted from Nasdaq and now trades over-the-counter. Mimedx has not reported earnings since April, and, thus far, the news for the company just seems to keep getting worse. Despite these numerous setbacks and no real clear path forward, Mimedx remains optimistic.
"We do believe Mimedx is making significant progress on numerous, critical fronts. In particular, the company has established an independent compliance function, assessed and improved sales and other business practices, is advancing the financial restatement process, continues to remediate the internal control environment, and is developing a long-range strategic plan," said company Chairman Charles Evans.