Organogenesis Q3 2024 Earnings Call Transcript

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November 12, 2024

Key Takeaways

  • We delivered Q3 net revenue of $115.2 million, a 6% year-over-year increase that beat the high end of guidance on strong customer demand.
  • In our second Phase 3 trial of RENEW for knee osteoarthritis, we exceeded enrollment targets, and an independent interim analysis recommended proceeding without changes, keeping our BLA submission on track for Q4 2025.
  • We published robust data on NuShield in the Journal of Wound Care showing a 48% greater probability of diabetic foot ulcer closure versus standard care, and we’re engaging CMS/MACs to secure Medicare coverage for our skin substitute portfolio.
  • We closed a $100 million Series A convertible preferred financing with Avista Healthcare Partners, significantly strengthening our balance sheet to fund growth initiatives, clinical programs, and working capital.
  • We raised full-year 2024 guidance to $455 million–$480 million in net revenue (5%–11% growth) and improved GAAP and non-GAAP earnings forecasts, reflecting stronger execution despite potential LCD headwinds.
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Earnings Conference Call
Organogenesis Q3 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Please standby. Welcome, ladies and gentlemen, to the Third Quarter of Fiscal Year 20 24 Earnings Conference Call for Organogenesis Holdings, Inc. At this time, all participants have been placed in 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 that 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.

Operator

You are cautioned not to place undue reliance upon any forward looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time, the company undertakes no commitments to update or revise the forward looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. This call will include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these non GAAP financial measures. Reconciliations 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, Chief Executive Officer and Chair of the Board. Please go ahead, sir.

Speaker 1

Thank you, operator, and welcome everyone to Organogenesis Holdings' 3rd quarter fiscal year 2024 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'll cover during our prepared remarks. I will review an overview of our Q3 revenue results and an update on our key operating and strategic developments in recent months. Dave will then provide you with an in-depth review of our Q3 financial results, our balance sheet and financial condition at quarter end, as well as our financial guidance for 2024, which we updated in our press release this afternoon.

Speaker 1

I'll then share some closing thoughts before we open the call up for questions. Beginning with the review of our revenue results for Q3, we delivered sales results above the high end of the guidance range outlined on our Q2 call. Our team's strong execution resulted in better than expected productivity despite continued disruption in the marketplace. Our 3rd quarter results reflect improving momentum in the underlying business trends and we were pleased to see customer demand in excess of what our guidance had assumed during the Q3. We believe the better than expected revenue results we have delivered in each of the 1st three quarters of 2024 represent the clearest evidence that we have focused our commercial team on the right strategy to navigate through this challenging operating environment.

Speaker 1

Turning to a review of our progress towards key strategic initiatives in the Q3. On August 8, we announced the additional clinical results from our 1st Phase 3 clinical trial, a prospective double blinded multicenter saline control parallel group clinical trial of 5 15 patients. The results met the expectations for the study by meeting the primary endpoint of a statistically significant reduction in knee pain and the first secondary endpoint of statistically significant maintenance of function at 6 months. We've also made important progress on our 2nd Phase 3 multi centered randomized clinical trial evaluating the safety and efficacy of RENEW during the Q3. We completed enrollment of 5.94 patients well ahead of our original timing expectations and notably we enrolled 120 more patients than the 4 74 required by the study.

Speaker 1

As announced in a separate press release, we received a favorable outcome of the pre specified interim analysis for the first 50% of the required patients in our 2nd Phase 3 trial. The Independent Data Monitoring Committee or DMC for the trial provided directional guidance on the results of the interim analysis while rigorously maintaining all aspects of study blinding. The DMC recommended that the trial proceed without modification and without increase to sample size. Additionally, the DMC found the safety data to be consistent with the known safety profile for RENEW. We continue to believe that if approved introducing RENEW to the large and growing pain management market represents a transformational opportunity for organogenesis.

Speaker 1

We believe RENEW, if approved, will potentially address an unmet clinical need for all patients suffering from symptomatic knee OA, a degenerative joint disease that affects more than 30,000,000 Americans. We have a clear roadmap and timeline for our ReNu BLA submission and we are on track to deliver the ReNu BLA submission by the end of Q4 2025. If successful, RENEW would be the only FDA approved biologic intra articular injection to improve pain symptoms related to symptomatic knee OA. Before turning the call over to Dave, I wanted to share a brief update on our recent progress in the areas of clinical validation and Medicare reimbursement and coverage. On October 1, we announced the publication of results from a robust 218 patient study of NuShield in the Journal of Wound Care.

Speaker 1

NuShield demonstrated statistically superior frequency of wound closure compared to the standard of care at 5 intervals from 4 weeks to 12 weeks. A total of 218 patients with challenging DFUs were randomized into 2 treatment groups, NuShield plus standard of care or standard of care alone. The NuShield group demonstrated a 48 percent greater probability of wound closure and decreased medium time to complete wound closure when compared to standard of care. We are pleased this data demonstrates NuShield provides a significant advantage when managing DFUs, a severe medical crisis that often leads to amputation and associated higher mortality rates, especially in underserved populations. As outlined on our latest earnings call, our comment letter to the MAX included this high quality published data and evidence evaluating NuShield for the treatment of DFU that was not considered in the draft LCD, which we believe demonstrates that NuShield meets all the criteria for coverage.

Speaker 1

As a leader in this field, we support CMS's evidence based approach to coverage for these serious wounds and believe this large peer reviewed publication satisfies the requirements for medical coverage under the proposed LCD. Our comment letter also included existing clinical and real world data supporting our case that PuraPly AM and XT meet the requirements for Medicare coverage as well. This data includes a high quality published data from 728 patients supporting coverage for PuraPly AM and XT for the treatment of DFU and VLUs and a comparative effectiveness study of 294 patients published in May of 2024 after the literature review for the draft LCD was completed, which shows non inferiority to TheraSkin, a product the draft LCD proposed to cover. We also made progress in expanding our clinical validation for PuraPly in the Q3. In August, we enrolled the 1st patient in our new RCT, the Prepare study evaluating the PuraPly AM plus standard of care versus standard of care alone in 170 patients with chronic DFUs.

Speaker 1

On November 1, CMS issued the final rules for the Medicare physician fee schedule and the hospital outpatient department. CMS has not proposed any changes to the payment policies for skin substitute in either setting and the final rule maintains the status quo. In the physician fee schedule final rule, there were no changes in payment policy for skin substitutes for 2025. CMS reiterated that its goal is to achieve a consistent payment approach for skin substitute products that does not negatively impact beneficiary access. CMS also noted that it intends to bridge the gap in variations of pricing for these products through the establishment of consistent framework for payment of skin substitutes under the physician fee schedule in future rulemaking.

Speaker 1

CMS does not say more about what that framework might look like or the timing of any future changes. Now we have communicated to CMS that they should transition to a value based payment methodology where skin substitute categories of pay on a fixed per square centimeter basis. This value based payment methodology has the potential to substantially reduce Medicare Part B expenditures, improve patient access and enable physicians to prescribe treatments that are based on the individual needs of the patients and provide the best outcome for patients and the healthcare system. While there was no change in payment policy for skin substitutes in the final rule for 2025, we were pleased to see the final rule included commentary from CMS recognizing the benefit of continued dialogue with interested parties on payment for skin substitute products to help inform policy changes for future rulemaking. As a leader in the market, we have been and will continue to actively engage with CMS to advocate for the requisite changes to the payment systems.

Speaker 1

We appreciate CMS' willingness to consider our framework and our feedback and we are particularly pleased in the acknowledgment of the need to establish a framework for consistent payment for skin substitute products under the physician fee schedule that does not negatively impact beneficiary access. We applaud the MACs for continuing to prioritize coverage with demonstrated clinical efficacy for skin substitute products. We have been pushing for reform for many years and believe that this proposed LCD represents a substantial step forward towards cleaning up the marketplace. Importantly, given our leadership position in the space, we remain vocal and active in support of the immediate need for reform. In addition to our direct efforts with CMS and the MAX, we are engaging with stakeholders including physicians, patient advocacy groups and clinical and industry associations and we are leading primary health policy education initiatives directed to 59 congressional offices.

Speaker 1

We want to ensure all parties are as well informed as possible and that they are carefully considering the impacts of potential changes to the coverage of skin substitutes for the treatment of DFUs and VLUs, including the potential treatment disparity in health and equity impact on populations with higher rates of diabetes and comorbidity. We continue to believe these material changes from the MAx and CMS in the coverage and payment of skin substitutes, if ultimately adopted, will be positive for the long term health of the wound care market and its patients, while there'll be a preliminary period of transition and disruption if these sweeping changes are implemented. We believe Organogenesis' strong brand equity, established commercial infrastructure and our plan to establish additional clinical validation to secure coverage of key commercialized products taken together represent a substantial competitive advantage for us that has us well positioned to maximize the enormous opportunity to serve more patients with our highly innovative and highly efficacious product. With that, let me turn the call over to Dave. Thanks, Gary.

Speaker 1

I'll begin with a review

Speaker 2

of our Q3 financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year over year basis. Net revenue for the Q3 was $115,200,000 up 6%. As Gary mentioned, these results were ahead of the expectations we provided on our Q2 call, which called for total Q2 revenue in a range of $105,000,000 to $113,000,000 reflecting continued strong momentum in the business during the Q3. Our Advanced Wound Care net revenue for the Q3 was $108,000,000 up 7% and net revenue from Surgical and Sports Medicine products for the 3rd quarter was $7,000,000 up 1%.

Speaker 2

Gross profit for the 3rd quarter was $88,000,000 or 76.7 percent of net revenue compared to 76.2% last year. Operating expenses for the Q3 were $82,100,000 compared to $74,700,000 last year, an increase of $7,400,000 or 10%. The year over year change in operating expenses was driven by a $7,600,000 or 12% increase in selling, general and administrative expenses compared to the prior year period. Research and development expenses declined 1% year over year and declined 34% sequentially, the latter of which was due to the timing of expenses associated with clinical research and trials. Operating income for the Q3 was $6,200,000 compared to operating income of $8,100,000 last year, a decrease of $1,800,000 or 22%.

Speaker 2

Net income for the Q3 was $12,300,000 compared to net income of $13,200,000 last year, an increase of $9,200,000 Adjusted net income for the 3rd quarter was $12,900,000 compared to $5,300,000 last year. The largest contributor to the year over year increase in net income and adjusted net income was a change in income tax. We had a benefit of $6,500,000 in the Q3 of 2024 compared to an expense of $4,500,000 last year. The change in income tax year over year was driven primarily by R and D tax credit incentives, partially offset by tax adjustments related to executive compensation and other non deductible expenses. Adjusted EBITDA for the Q3 was $13,400,000 or 12% of net revenue compared to $16,000,000 or 14.7 percent of net revenue last year.

Speaker 2

We provided a full reconciliation of our adjusted net income and adjusted EBITDA results in our earnings release. Turning to the balance sheet. As of September 30, 2024, the company had $94,900,000 in cash, cash equivalents and restricted cash and $62,100,000 in net debt obligations, compared to $104,300,000 in cash, cash equivalents and restricted cash and $66,200,000 in net debt obligations as of December 31, 2023. We also have up to $125,000,000 of available borrowings on our revolving credit facility as of September 30, 2024. As announced in a separate press release this afternoon, we completed the closing of a private placement of Series A convertible preferred stock to Avista Healthcare Partners with gross proceeds to the company of $100,000,000 prior to deduction of fees and expenses.

Speaker 2

The company intends to use these net proceeds from the closing of the private placement to fund strategic growth initiatives including but not limited to operating and commercial activities, clinical development programs, working capital, capital expenditures and for general corporate purposes. This transaction substantially enhances our balance sheet and financial condition with important capital to execute our long term growth strategies and to provide us cash to service remaining principal owed at the maturity of our term loan facility in mid-twenty 26. We appreciate the support from leading healthcare investor and believe it reflects Avista's confidence in the compelling opportunity investing in Organogenesis presents. Turning to a review of our 2024 financial guidance, we are updating revenue guidance to reflect the better than expected results in the Q3. Our revenue guidance continues to reflect the potential near term disruption in the Q4 in the market that we expect from the LCDs.

Speaker 2

Note our guidance continues to reflect the expectation that the final ruling from the MAX will be announced in the Q4 with an effective date of January 1, 2025. For the 12 months ending December 31, 2024, the company now expects net revenue between $455,000,000 480,000,000 dollars representing a year over year increase in the range of 5% to 11% as it compared to net revenue of $433,100,000 for the year ended December 31, 2023. The 2024 net revenue guidance range assumes net revenue from Advanced Wound Care Products between $429,000,000 $452,000,000 representing a year over year increase in the range of 6% to 11%. And net revenue from Surgical and Sports Medicine products between $26,000,000 $28,000,000 representing a year over year change in the range of a decline of 6% to an increase of 1%. We have updated our GAAP profitability and EBITDA guidance as well.

Speaker 2

Specifically, we now expect net loss in the range of $12,300,000 to $600,000 compared to a range of GAAP net loss of $27,000,000 to a GAAP net loss of $12,000,000 previously. We now expect EBITDA in the range of a loss of $1,300,000 to positive EBITDA of $14,400,000 compared to an EBITDA range of a loss of $17,000,000 to positive EBITDA of $2,000,000 previously. We now expect non GAAP adjusted income in the range of $6,700,000 to $18,400,000 compared

Speaker 3

to a

Speaker 2

range of non GAAP adjusted net loss of $8,000,000 to non GAAP adjusted net income of $7,000,000 previously. And we now expect adjusted EBITDA in the range of $31,700,000 to $47,400,000 compared to adjusted EBITDA in the range of $16,000,000 to $35,000,000 previously. With that, I'll turn the call back to Gary for some closing remarks.

Speaker 1

Thanks, David. Our 3rd quarter results reflect strong execution from our commercial team amidst a continuing challenging operating environment. We strongly believe the material changes proposed by the MAX in the coverage of skin substitutes, if ultimately adopted, will be positive for the long term health of the wound care market. We have a strategy to leverage our existing strong clinical and real world data, including RCTs and have already initiated the new RCT to secure additional clinical evidence and we expect to secure coverage for additional products on the covered list later this year and into next year. While there will be a period of transition and disruption if these sweeping changes are implemented, we believe that Organogenesis' strong brand equity, established commercial infrastructure and plan to establish additional clinical validation to secure coverage of key commercialized products taken together represent a substantial competitive advantage for us that has us well positioned to maximize the enormous opportunity to serve more patients.

Speaker 1

Further, while the final physician fee schedule rule for 2025 did not include the substantial changes that we believe are needed to be implemented. We believe CMS's willingness to consider our feedback and we're particularly pleased in its acknowledgment of the need to establish a framework for consistent payment for skin substitute products under the physician fee schedule that does not negatively impact patient beneficiary access. We are excited by the continued progress in our RENEW program and have a clear target for submission of our BLA by the end of Q4 2025 and if approved introducing RENEW as an innovative pain management solution for the millions of patients suffering from knee OA represents a truly transformational opportunity for organogenesis and importantly one that is consistent with our mission to provide integrated healing solutions that substantially improve outcomes while lowering the overall cost of care. And I would also like to acknowledge the continued hard work and dedication to our mission demonstrated by our employees throughout the organization. Our strong performance and progress towards our key strategic initiatives over the 1st 9 months of 2024 is a result of their efforts.

Speaker 1

And finally, I'd like to recognize the significant investment in Organogenesis that we received from Avista Healthcare Partners, a leading healthcare investor and one of the original investors when we went public in 2018. This financing provides valuable strategic growth capital and significantly enhances our balance sheet and financial flexibility. We look forward to leveraging Avista's deep industry expertise and proactive value added investment approach and believe this investment from a leading healthcare investor represents a strong validation of the long term opportunity for Organogenesis as a leader in our space with highly innovative products that deliver on our mission. With that, I'll turn the call over to the operator to open the call for questions.

Operator

Thank And our first question will come from Ross Osborne from Cantor Fitzgerald.

Speaker 4

Hey guys, congrats on the quarter and thanks for taking our questions. So starting off, would you walk through how your initiatives on broadening your sales force has gone during the quarter in terms of direct reps? And would you provide an update on how many of those reps are now focused on the Sports Med business?

Speaker 1

Dave, do you want to grab that? Dave, you're on mute?

Speaker 2

Sorry, I was. Yes, we did increase our rep count in the quarter. We're seeing some good performance from that standpoint and seeing some great productivity that we're seeing particularly out of the wound care reps. I think on the direct side and SSM, I think we're under 20 at this point.

Speaker 4

Okay. Got it. And then looking at OpEx spend and particularly the R and D line, would you provide some more color where you were able to pull in spend during the quarter? And how we should think about spend in 2025 with some of the trials going on there?

Speaker 2

Yes, sure. So that was lower than our expectations where we expected it to tick down a little bit from Q2 and we expect it to be closer to the Q2 spend rate in the 4th quarter as we kind of pulled back up. As you know, we're spending quite a bit on the BLA and so it does tend to be lumpy sometimes. And so it just was the timing of spend that hit in the Q3, a little bit less than we had anticipated. As far as 2025 is concerned, obviously, we haven't guided to that yet, but we're going to continue to invest in a similar fashion as those efforts around the BLA continue.

Speaker 4

Great. Thanks for taking our questions and congrats again on the quarter.

Operator

Our next question comes from the line of Ryan Zimmerman from BTIG.

Speaker 3

Hey, good afternoon. Can you hear me okay?

Speaker 1

Yes. Good afternoon, Ryan.

Speaker 3

All right. So, I appreciate that there's still some uncertainty in the market, Gary and Dave, around the LCDs. But seasonally, the 4th quarter is typically the strongest. And I guess, I'm curious, the implied guidance for 4th quarter calls for a bit of a step down. So maybe what's assumed on the low end?

Speaker 3

What's assumed on the high end in terms of impacts to the AWC business? And what did you see this quarter, just real quick Dave, what did you see this quarter in terms of impact because you were able to really manage through it?

Speaker 2

Yes. So we had relatively limited impact in the quarter. But obviously, we wanted to keep a relatively wide range in the 3rd Q4, just to be sure that we had that captured. But what we've seen is great momentum in the business in the first half that carried into the 3rd quarter. Again, as you mentioned, very little or I mentioned very little disruption from that perspective.

Speaker 2

As far as the Q4 guide, obviously, we took up the full year on both the low and the high, but then we kept the low end consistent with what we talked about in the Q2 call. So the concept there really is that our expectation continues to be that we expect the LCD to go into effect in early January. And so sometime in mid November, we would expect to see that come out because I think there's a 45 day period between when it's announced and when it goes live. So the question is, do customers pull back on their spending from that perspective given the drop of the LCD depending on what it says. So that's the kind of lower end.

Speaker 2

And then on the higher end, of course, it's just business as usual. Again, we've seen very good progress and a great business momentum in the 1st 3 quarters of the year, beating each consecutive quarter. So that's kind of the range, if that helps.

Speaker 3

Okay. Very helpful. And then, Gary, on renew, saw the interim analysis yesterday, nice to see certainly consistent another proof point in the potential for renew. Between now and Q4 'twenty five, what needs to occur in order to meet those timelines and what's assumed in terms of you guys kind of wrapping up the second confirmatory trial?

Speaker 1

Sure. So we've achieved last patient, last visit in June. We would expect to have the interim analysis of that second trial by Q4. And assuming that we're able to hit that deadline, then we expect that we'll be able to make the filing of the BLA in Q4 of 'twenty five. So fortunately, last patient, last visit has been accomplished.

Speaker 1

And now it's a matter of actually crunching the data and getting that true interim analysis in Q4 of this year and we feel confident that we'll be on track to submit in Q4 of 'twenty five the full BLA.

Speaker 3

Okay. Thank you for taking the questions.

Speaker 1

Sure.

Operator

Thank

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