Organogenesis Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen to the First Quarter of Fiscal Year 2023 Earnings Conference Call for the Organogenesis Holdings Inc. At this time, all participants have been placed in a listen only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks today may contain forward looking statements are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A Risk Factors of the company's most recent annual report and its subsequently filed quarterly reports. You are cautioned not to place undue reliance upon any forward looking statements, which speak only as of the date made.

Operator

Although it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward looking statements. Were as a result of new information, future events or otherwise, except as required by applicable securities laws. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non GAAP financial measures. Reconciliation of those non GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.

Operator

I would now like to turn the call over to Mr. Gary S. Gilhaney, Senior, Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir.

Speaker 1

Thank you, operator, Welcome everyone to Organogenesis Holdings Q1 fiscal year 2023 earnings conference call. I'm joined on the call today by Dave Francisco, our Chief Financial Officer. Let me start with a brief agenda of what we will cover during our prepared remarks. I'll begin with an overview of our Q1 revenue results and an update on our key operating developments in recent months. Dave will then provide you with an in-depth review of our Q1 financial results, our balance sheet and financial condition quarter end and our 2023 financial guidance, which we updated in today's press release, and then we'll open it up for questions.

Speaker 1

Beginning with a review of our revenue results for Q1, we reported net revenue of $107,600,000 for the Q1, an increase of 11% year over year, which was driven by a 12% increase in the sale of our Advanced Wound Care products, Partially offset by a 4% decrease in the sales of our Surgical and Sports Medicine products. 1st quarter sales net revenue results came in above the high end of the guidance range we provided on our 4th quarter earnings call sales of both our Advanced Wound Care and our Surgical and Sports Medicine products exceeding the high end of our expectations in Q1. While sales results in both our primary product groupings exceeded the high end of expectations in Q1, sales of Advanced Wound Care products drove the majority of the upside in the quarter. Advanced Wound Care product sales were driven by better than expected demand for both our PuraPly and non PuraPly products in the Q1, fueled by the continued strong demand for our well established, highly differentiated PuraPly brand and the strength and adoption and utilization of our amniotic technologies. Importantly, our Advanced Wound Care product sales results Exceeded the high end of our expectations in both the hospital outpatient setting and the physician office in Q1.

Speaker 1

As expected, we leveraged our diversified portfolio and leadership position in wound care centers and physician offices across the U. S. That delivered strong growth in Q1. Specifically, excluding dermograph, our team delivered high teens growth year over year In the number of accounts served in the hospital outpatient setting and high single digit growth in customer accounts in the physician office setting. Additionally, we delivered more than 20% growth in units sold year over year in Q1.

Speaker 1

We are proud of the team's execution in Q1 and believe our ability to deliver results above the high end of our guidance range represents another clear illustration that we have the right strategy to maximize our competitive position as a leader in the advanced wound care market. Turning to an update on our operational progress in recent months. We continue we recently completed the construction and validation activities for our new corporate logistics center at our headquarters in Canton, Massachusetts, expanding our manufacturing capacity overall for our product portfolio and our pipeline products and specifically for developing manufacturing capacity for our dermograph and Transite products that were previously manufactured in California. To that end, we are working with development firms to assess building additional manufacturing space at our manufacturing headquarters here in Massachusetts. And in parallel, we're looking at alternatives for suitable existing manufacturing space within the region.

Speaker 1

As previously communicated, we expect to have a definitive plan by the end of the Q3. Our ongoing Phase 3 clinical trial for RENEW for the treatment of knee osteoarthritis continues to progress as planned. The efficacy phase of the trial will be completed in July and we expect to achieve the last patient last visit milestone and completion of the trial by the end of the year. In recent months, we've also made progress with respect to our second Phase 3 study for RENEW. We are engaging with the FDA on our submission of an IND amendment to conduct the trial.

Speaker 1

We selected the contract research organization that will conduct certain operational and data management aspects of the trial and assuming a timely approval of the IND, We remain on track with our plan to launch the operational aspects of the 2nd Phase 3 trial by the end of the Q2 of this year with first patient enrolled expected to be at the end of the Q3. We also have a scheduled meeting with the FDA in June to discuss the CMC requirement For the BLA for RENEW, we expect to have a subsequent discussion with the FDA regarding the clinical data requirements for the BLA. And as previously discussed, we will propose that the current Phase 3 trial combined with the published 200 patient RCT as valid scientific evidence and sufficient for BLA approval. As a reminder, our plan is based on our belief that moving forward with a second trial as soon as we hear from the FDA will enable us to leverage the major operational advantages of continuing with the current active investigator site. This plan essentially gives us more options in our regulatory strategy.

Speaker 1

Lastly, I'd like to share a few noteworthy items related to our continued efforts to engage with clinicians and expand the awareness of our product portfolio's clinical efficacy and the value for the healthcare system. Organogenesis was a significant contributor at the recent Symposium on Advanced Wound Care Conference or SAWC. This is the primary clinical and scientific conference for Advanced Wound Care. We presented 8 posters and abstracts with one chosen as the top poster in the clinical research category. We also sponsored 5 symposium on in workshops to further educate clinicians on Organogenesis' portfolio of products.

Speaker 1

This week, we are presenting at ISCOR Health Conference in Boston, a comparative effectiveness research study on the use of aplograft cell therapy in wound. This continues our significant investment in demonstrating the clinical and economic effectiveness of our products with real world evidence. We're also pleased with the recent publication of a PuraPly antimicrobial clinical study in the Wound Management and Prevention Journal. This exciting pilot study evaluated the effectiveness of PuraPly antimicrobial in wounds for which bio burden and biofilm contamination were detected by an advanced imaging diagnostic device. With that, let me turn the call over to Dave to discuss the financial results.

Speaker 2

Thank you, Gary. I'll begin with a review of our Q1 financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year over year basis. Net revenue for the Q1 was $107,600,000 up 11%. Our Advanced Wound Care net revenue for the Q1 was $100,900,000 Up 12% and net revenue from Surgical and Sports Medicine products for the Q1 was $6,700,000 down 4%.

Speaker 2

Gross profit for the Q1 was $81,000,000 or approximately 75.3 percent of net revenue compared to 74.2% last year. Change in gross margin was driven primarily by increased sales volume in Advanced Wound Care products as well as the shift in product mix to our higher gross margin products. Operating expenses for the Q1 were $85,000,000 compared to $72,200,000 last year, an increase of $12,900,000 or 18%. The increase in operating expenses in the Q1 was driven by a $10,300,000 or 16% increase in selling, general and administrative expenses And a $2,600,000 or 30 percent increase in research and development costs compared to the prior year period. 1st quarter GAAP operating expenses included certain non operating items totaling $1,900,000 consisting of employee severance and benefits as well as other exit costs associated with certain restructuring activities.

Speaker 2

This compares to $300,000 of restructuring related charges in the prior year. On February 3, 20 23, we committed to a plan to restructure our workforce to improve productivity and enhance profitability. The reduction in force reduced our headcount by 71 employees or approximately 7% of all employees. The company incurred a total charge of 1,800,000 the Q1 in connection with the restructuring, primarily consisting of severance payments. Excluding restructuring items and non cash intangible amortization $1,200,000 in both periods.

Speaker 2

Non GAAP operating expenses for the Q1 increased $11,000,000 or 16% year over year, Driven by higher clinical study related spending in support of our RENEW studies and a 14% growth in SG and A expenses With roughly half of that increase related to the timing of our national sales meeting. Note that we have a detailed reconciliation reconciliation of these non operating and non cash items in today's earnings press release. Our non GAAP operating expense growth expectations for 2023 Reflect mid single digit growth year over year, consistent with our strategy to prioritize investments in areas that enhance our foundation future growth. Operating loss for the Q1 was $4,000,000 compared to an operating loss of $100,000 last year, an increase in loss of 3,900,000 Total other expense for the Q1 was $600,000 compared to $700,000 last year, A decrease of $100,000 or 12%. Net loss for the Q1 was $3,000,000 compared to $900,000 last year, an increase in loss of $2,100,000 Adjusted EBITDA for the Q1 was $3,800,000 or 3.5 percent of net revenue compared to $5,000,000 or 5.2 percent of net revenue last year.

Speaker 2

We provided a full reconciliation of our adjusted EBITDA results and our earnings press release. Turning to our balance sheet. As of March 31, 2023, the company had $89,400,000 in cash, cash equivalents and restricted cash $69,900,000 in debt obligations. This compared to $103,300,000 in cash, cash equivalents and restricted cash $70,800,000 in debt obligations as of December 31, 2022. We also have up to $125,000,000 of available borrowings on our revolving credit facility as of March 31, 2023.

Speaker 2

Turning to a review of our 2023 financial guidance, which we updated in our press release this afternoon. For the 12 months ending December 31, 2023, the company now expects net revenue of between $454,000,000 $466,000,000 representing a year over year increase in the range of 1% to 3% as compared to net revenue of 450,900,000 for the year ended December 31, 2022. This compares to our prior guidance of $450,000,000 to 462,000,000 The 2023 net revenue guidance range assumes net revenue from Advanced Wound Care products between $424,000,000 $432,000,000 Representing a year over year change in the range of flat to up 2%. This compares to our prior guidance of $420,000,000 to 428,000,000 Net revenue from Surgical and Sports Medicine products between $30,000,000 $34,000,000 represented an increase of 5% to 19% year over year. This range is unchanged versus our prior guidance assumptions.

Speaker 2

In terms of our profitability guidance for 2023, the company expects to generate GAAP net income of between $3,200,000 $10,900,000 adjusted net income between $8,400,000 16,100,000 We also expect EBITDA of between $28,000,000 $38,700,000 and adjusted EBITDA of $38,100,000 $48,800,000 In addition to our formal guidance for 2023, we are providing some consideration for modeling purposes for the fiscal year 2023. We now expect sales of our PuraPly products will decrease in the range of 11% to 20% year over year compared to our prior guidance range, which assumes a decrease 18% to 26% year over year. Sales of our non PuraPly products will increase at the midpoint of the range approximately 22% year over year compared to our prior guidance, which assumed growth of approximately 28% year over year. Gross margins of approximately 75.5 percent to 76 0.5%. Total GAAP operating expenses will increase approximately 2% to 3% year over year and total non GAAP operating expenses will increase approximately 4% to 5% year over year.

Speaker 2

Our 2023 non GAAP operating expenses exclude non cash intangible amortization of approximately 2,900,000 and estimated restructuring charges of $2,200,000 total interest and other expenses of approximately $3,300,000 compared to our prior guidance of $5,200,000 We now expect our full year GAAP tax rate in the range of 42.5% to 61% at the high end and low end of our guidance range respectively. This compares to our prior guidance, which assumed a full year GAAP tax rate of 29%. We continue to expect non GAAP tax rate on adjustments of 27%. We now expect non cash depreciation of approximately $11,500,000 compared to prior guidance of $6,400,000 and our estimates for non cash stock comp expense and weighted average diluted shares are unchanged at approximately $7,900,000 and approximately $13,200,000,000 shares. We also expect full year 2023 CapEx approximately $25,000,000 to $30,000,000 And finally, we expect the 2nd quarter revenue in the range of approximately $113,000,000 $117,000,000 representing a decline of approximately 4% to 7% year over year.

Speaker 2

With that, I'll turn the call back over to Gary for some closing remarks.

Speaker 1

Thank you, Dave. Our updated guidance reflects our expectation for measured growth in sales of Advanced Wound Care products in 2023, driven primarily by the impact of key products in the physician office settings working through the national launches with recently published ASP. We also expect to navigate the continuing challenges in the office in 2023 due to customer uncertainty surrounding CMS' potential change Medicare payments under the physician fee schedule for advanced wound care treatment. We applaud CMS for pushing forward with their initiative published ASPs for skin substitutes this year. We now have the opportunity to introduce our differentiated clinically proven solution to more patients nationwide and this represents a significant long term growth opportunity for Organogenesis.

Speaker 1

Importantly, executing on our strategy this year is expected to result in growing our share of patients treated with advanced modalities again in 2023. The emphasis on more patients being treated with advanced modalities is consistent with CMS' efforts to reduce the burden on the healthcare system. Rising costs may be attributable to untreated and properly treated wounds that resist healing and result in more serious complications such as amputations. By treating wounds with advanced modalities, we believe these complications can be avoided. Proper treatment with advanced cell and tissue products that demonstrate clinical efficacy have the added benefit of improving patients' lives while reducing the overall cost to the healthcare system Greater awareness of these advanced technologies among healthcare providers and patients should be a priority and can contribute to CMS' efforts to reduce costs.

Speaker 1

We also expect to strengthen our competitive position in the surgical sports medicine market in 2023. We are in year 2 of our strategic repositioning of the business following the expiration of the FDA's enforcement grace period in May of 2021. We continue to identify opportunities to expand our commercial focus beyond SpineFusion in foot and ankle with emphasis on increasing awareness of our product solutions for surgical wounds and soft tissue procedures. We'll continue to optimize our independent agency relationships And look for further progress in our ongoing pilot programs, which are testing potential commercial strategies, including using small direct teams of specialists in certain procedure areas. We also look forward to strong market adoption of our PuraPly MZ product as it enters full commercialization this year.

Speaker 1

As Dave mentioned earlier, we are focused on prudent investment in our highest priority operating expense areas, which we expect will help drive strong adjusted EBITDA generation in 2023. We're confident that we have the right strategy the Surgical and Sports Medicine market in 2023. Importantly, we continue to believe that the long term growth opportunity for Organogenesis is very compelling And we remain confident in our long term target of sustainable low double digit growth on a normalized basis. We will continue to be a leader in Advanced Wound Care, While improving our competitive position in surgical and sports medicine in the markets by launching highly innovative, highly efficacious products as we deliver on our mission

Operator

And our first question will come from the line of Ryan Zimmerman with BTIG. Your line is open. Please go ahead.

Speaker 3

Good evening. Thanks for taking the questions and congrats on the nice start to the year Gary and Dave.

Speaker 1

Thank you, Ryan. I wanted

Speaker 3

to talk about guidance for a moment here, if I could start there. I have a number of questions and I'm going to Maybe take the latitude to ask a few tonight. Just number 1 on guidance. So relative to our expectations, you guys Really had a nice speed, about $12,000,000 versus what we were looking for and I think your guidance at the time. And Relative to that, guidance is going up about $4,000,000 for the remainder of the year.

Speaker 3

Help us understand what you're seeing the market that's maybe holding you back or if it's conservatism, just want to understand kind of your philosophy and thinking around the guidance.

Speaker 2

Yes, Ryan, this is Dave. I mean, obviously, we're really pleased with the Q1. It was a great performance. The commercial teams did a really nice job. It's a great start to the year.

Speaker 2

No question about it. I think we do see some nice things in the operating environment that but it's early days. It's just early in the year for us to pass through that entire amount is what we're thinking.

Speaker 1

Okay. This is Gary Ryan. I mean, when we think about I'm sorry, the physician fee schedule is coming out in July and we're just being cautious that we want to make sure that Any disruption in the market, confusion or anything. We're not expecting anything specific, but sometimes there can be confusion. We help our customers get through that and we're just waiting maybe cautiously to see how that all plays out and more.

Speaker 3

That's very helpful, Gary. And to that point, we obviously watch the physician fee schedule closely To see kind of how CMS is posturing and then what their rates are. Past few quarters has been a little bit challenging in terms of competitive dynamics as a result of the lack of clarity on that fee schedule. I think if I recall, you were expecting that to moderate Into the Q2. And again, appreciate you may not know what CMS will do, but as of right now, what's your current thinking around Some of the dynamics that have or the forces that have taken advantage of the lack of transparency On that fee

Speaker 1

schedule. So we're seeing actually on a regional basis some improvements And some of that is just the effectiveness of our national launches working through some of the challenges that we've seen in the past. There still are a lot of products that are not on the published list. I think there's about 135 CTPs, about 58 of them have been published. There's still a lot that have not been.

Speaker 1

But regionally, we're seeing some improvements. That's what we're expecting to continue. We're expecting to continue to see improvement throughout the year And that's kind of what's built into our guidance.

Speaker 3

Very helpful. And I'm going to keep rolling here for if I may. Just a couple of other questions for me. Number 1, Gary, I think I heard you high teens growth in the outpatient setting. What was the growth in the physician office?

Speaker 3

I think you called it out.

Speaker 1

Yes, it was high single digits in accounts.

Speaker 3

High single digits. Okay. And so to that point, Having seen some of your competitors report already, what's your sense of the market just broadly In the Advanced Wound Care space, what are you expecting in terms of patient volumes into the door? What do you see in this quarter? And is it are we seeing any improvement just broadly speaking in the market?

Speaker 1

Well, we clearly have seen improvement in the Q1. In fact, I think that the normal seasonality that we've typically seen From Q4 to Q1 is significantly less. We're seeing 20% unit growth across our portfolio, virtually all of our major brands as a brand have moved forward and Even our XT products, which we're seeing a lot better performance than we expected, which is why we've changed the guidance a little bit Sure. So we're seeing definitely more patients being treated, more units being applied. We're adding more accounts Than we even expected.

Speaker 1

So definitely see some positive trends. We'd like to see those trends continue. Again, we're being a little cautious Perhaps we want to see that trend continue and we think it will. But right now, there's definitely strength in the market.

Speaker 3

Okay. Last one for me and I'll hop back in queue. But on renew, obviously, a lot of good milestones coming. And in conjunction with that, I guess I want to ask if the FDA says you don't have to do a Phase 3 second Phase 3 trial, excuse me. Do you have a sense of what you would save in cost For that.

Speaker 3

And as I think about that in the context of say your adjusted EBITDA guidance, could that proved to be upside to that guidance. Maybe what are you factoring in there for the cost of a secondary trial That begins later this year.

Speaker 1

I don't know, Dave, if you go. Yes.

Speaker 2

I mean, obviously, Ryan, the trials are significant. If we're able To only go with the 2 we've got so far and skip that second Phase 3, it would be a significant change in the financial profile Going forward over the next couple of years.

Speaker 3

Okay. But just to be clear, Dave, right now, those costs are built into your model And that's assumed in the guidance,

Speaker 2

as having to proceed forward. Yes. It is. We expect that, yes. And of course, it's a couple of years For the entire amount, we talked about the 1st patient enrollment at the end of Q3.

Speaker 2

So it's back end loaded that cost in this year. So more of that would pull still in 2024 Yes.

Speaker 3

Yes. Makes sense. Okay. I'm going to wrap up there, but really good quarter time guys.

Speaker 2

Thank you, Ryan. Thanks, Ryan.

Operator

Thank you. We are currently showing no remaining questions in the queue. That does conclude today's conference. Thank you for participating.

Speaker 1

Thank you.

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Organogenesis Q1 2023
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