Organogenesis - Q1 2023

Transcript

Operator (participant)

Welcome, 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 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.

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 commitment to update or revise the forward-looking statements, whereas the 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. I would now like to turn the call over to Mr. Gary S. Gillheeney, Senior Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir.

Gary S. Gillheeney, Sr. (President and CEO)

Thank you, Operator. Welcome everyone to Organogenesis Holdings first quarter 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 first quarter revenue results and an update on our key operating developments in recent months. Dave will provide you with an in-depth review of our first quarter financial results, our balance sheet and financial condition at quarter end in our 2023 financial guidance, which we updated in today's press release. We'll open it up for questions.

Beginning with a review of our revenue results for Q1, we reported net revenue of $107.6 million for the first quarter, 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. First quarter sales net revenue results came in above the high end of the guidance range we provided on our fourth quarter earnings call, with sales of both our advanced wound care and our surgical 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 first quarter, fueled by the continued strong demand for our well-established, high differentiated PuraPly brand and the strength in 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. As expected, we leveraged our diversified portfolio and leadership position in wound care centers and physician offices across the U.S. to deliver strong growth in Q1. Specifically, excluding Dermagraft, 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.

We delivered more than 20% growth in units sold year-over-year in Q1. 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 recently completed the construction and validation activities for our new corporate logistics center at our headquarters in Canton, Massachusetts, as well as the completion of additional manufacturing space at our nearby facility in Norwood, Massachusetts.

We continue to focus on and invest in expanding our manufacturing capacity overall for our product portfolio and our pipeline products, and specifically for developing manufacturing capacity for our Dermagraft and TransCyte 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. In parallel, we're looking at alternatives for suitable existing manufacturing space within the region. As previously communicated, we expect to have a definitive plan by the end of the third quarter. Our ongoing phase III clinical trial for ReNu 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 III study for ReNu. We are engaging with the FDA on our submission of an IND amendment to conduct the trial. We've 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 second phase III trial by the end of the second quarter of this year, with first patient enrolled expected to be at the end of the third quarter. We also have a scheduled meeting with the FDA in June to discuss the CMC requirements for the BLA for ReNu. We expect to have a subsequent discussion with the FDA regarding the clinical data requirements for the BLA.

As previously discussed, we will propose that the current phase III trial combined with the published 200 patient RCT as valid scientific evidence and sufficient for a BLA approval. As a reminder, our plan is based on our belief that moving forward with the 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. 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 to 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 eight posters and abstracts, with one chosen as the top poster in the clinical research category. We also sponsored five symposium and workshops to further educate clinicians on Organogenesis' portfolio of products. This week, we are presenting at ISPOR Health Conference in Boston, a comparative effectiveness research study on the use of Apligraf cell therapy in wounds. 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 & Prevention Journal. This exciting pilot study evaluated the effectiveness of PuraPly antimicrobial in wounds for which bioburden and biofilm contamination were detected by an advanced imaging diagnostic device. Let me turn the call over to Dave to discuss the financial results.

David C. Francisco (CFO)

Thank you, Gary. I'll begin with a review of our first quarter financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net revenue for the first quarter was $107.6 million, up 11%. Our advanced wound care net revenue for the first quarter was $100.9 million, up 12%, and net revenue from Surgical and Sports Medicine products for the first quarter was $6.7 million, down 4%. Gross profit for the first quarter was $81 million, or approximately 75.3% 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 a shift in product mix to our higher gross margin products.

Operating expenses for the first quarter were $85 million, compared to $72.2 million last year, an increase of $12.9 million or 18%. The increase in operating expenses in the first quarter was driven by a $10.3 million or 16% increase in selling, general, and administrative expenses, and a $2.6 million or 30% increase in research and development costs compared to the prior-year period. First quarter GAAP operating expenses included certain non-operating items totaling $1.9 million, consisting of employee severance and benefits, as well as other exit costs associated with certain restructuring activities. This compares to $0.3 million of restructuring related charges in the prior-year. On February third, 2023, 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 $1.8 million in the first quarter in connection with the restructuring, primarily consisting of severance payments. Excluding restructuring items and non-cash intangible amortization of $1.2 million, both periods, non-GAAP operating expenses for the first quarter increased $11 million or 16% year-over-year, driven by higher clinical study related spending in support of our ReNu studies and a 14% growth in SG&A expenses, with roughly half of that increase related to the timing of our national sales meeting. Note that we have a detailed 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 for future growth. Operating loss for the first quarter was $4 million, compared to an operating loss of $0.1 million last year, an increase in loss of $3.9 million. Total other expense for the first quarter was $0.6 million compared to $0.7 million last year, a decrease of $0.1 million or 12%.

Net loss for the first quarter was $3 million compared to $0.9 million last year, an increase in loss of $2.1 million. Adjusted EBITDA for the first quarter was $3.8 million, or 3.5% of net revenue, compared to $5 million or 5.2% of net revenue last year. We provided a full reconciliation of our adjusted EBITDA results in our earnings press release. Turning to our balance sheet, as of March 31st, 2023, the company had $89.4 million in cash equivalents, and restricted cash, and $69.9 million in debt obligations. This compared to $103.3 million in cash equivalents, and restricted cash and $78. million in debt obligations as of December 31st, 2022.

We also have up to $125 million of available borrowings on our revolving credit facility as of March 31st, 2023. Turning to a review of our 2023 financial guidance, which we updated in our press release this afternoon. For the 12 months ending December 31st, 2023, the company now expects net revenue of between $454 million and $466 million, representing a year-over-year increase in the range of 1%-3% as compared to net revenue of $450.9 million for the year-ended December 31, 2022. This compares to our prior guidance of $450 million-$462 million.

The 2023 net revenue guidance range assumes net revenue from advanced wound care products between $424 million and $432 million, representing a year-over-year change in the range of flat to up 2%. This compares to our prior guidance of $420 million-$428 million. Net revenue from surgical and sports medicine products between $30 million and $34 million, represent an increase of 5%-19% year-over-year. This range is unchanged versus our prior guidance assumptions. In terms of our profitability guidance for 2023, the company expects to generate GAAP net income of between $3.2 million and $10.9 million, adjusted net income between $8.4 million and $16.1 million.

We also expect EBITDA of between $28 million and $38.7 million, and adjusted EBITDA of $38.1 million and $48.8 million. 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%-20% year-over-year, compared to our prior guidance range, which assumed a decrease of 18%-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%-76.5%.

Total GAAP operating expenses will increase approximately 2%-3% year-over-year. Total non-GAAP operating expenses will increase approximately 4%-5% year-over-year. Our 2023 non-GAAP operating expenses exclude non-cash intangible amortization of approximately $2.9 million and estimated restructuring charges of $2.2 million. Total interest and other expenses of approximately $3.3 million compared to our prior guidance of $5.2 million. We now expect our full-year GAAP tax rate in the range of 42.5%-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 $11.5 million compared to prior guidance of $6.4 million. Our estimates for non-cash stock comp expense and weighted average diluted shares are unchanged at approximately $7.9 million and approximately 132 million shares. We also expect full-year 2023 CapEx to be approximately $25 million-$30 million. Finally, we expect the second quarter revenue in the range of approximately $113 million-$117 million, representing a decline of approximately 4%-7% year-over-year. With that, I'll turn the call back over to Gary for some closing remarks.

Gary S. Gillheeney, Sr. (President and CEO)

Thank you, Dave. Our updated guidance reflects our expectations 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 ASPs. We also expect to navigate the continuing challenges in the office in 2023 due to customer uncertainty surrounding CMS's potential change for Medicare payments under the physician fee schedule for advanced wound care treatments. We applaud CMS for pushing forward with their initiative to publish ASPs for skin substitutes this year. We now have the opportunity to introduce our differentiated, clinically proven solutions to more patients nationwide, and this represents a significant long-term growth opportunity for Organogenesis. 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's efforts to reduce the burden on the healthcare system. Rising costs may be attributable to untreated and improperly 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 overall costs to the healthcare system, and greater awareness of these advanced technologies among healthcare providers and patients should be a priority and can contribute to CMS's efforts to reduce costs.

We also expect to strengthen our competitive position in the surgical sports medicine market in 2023. We are in year two 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 spine fusion and foot and ankle, with an 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.

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 to continue to build on our leadership position in the office setting as well as in wound care centers across the United States, and to strengthen our competitive position in 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 end markets by launching highly innovative, highly efficacious products as we deliver on our mission to provide integrated healing solutions that substantially improve outcomes and lower the overall cost of care. Thank you. Operator?

Operator (participant)

Thank you, sir. If you'd like to ask a question, please signal by pressing star 11 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Our first question will come from the line of Ryan Zimmerman with BTIG. Your line is open. Please go ahead.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

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

Gary S. Gillheeney, Sr. (President and CEO)

Thank you, Ryan.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Wanted to talk about guidance for a moment here, if I could start there. I have a number of questions, and I'm gonna maybe take the latitude to ask a few tonight. Just number one, on guidance, you know, so, you know, relative to our expectations, you guys really had a nice beat, about $12 million versus what we were looking for and I think your guidance, you know, at the time. Relative to that, guidance is going up about $4 million for the remainder of the year. Help us understand what you're seeing in the market that's maybe holding you back or if it's, you know, conservatism. Just wanna understand kinda your philosophy and thinking around the guidance.

David C. Francisco (CFO)

Yeah, Ryan, this is Dave. I mean, obviously we're really pleased with the first quarter. It was a great performance. The commercial team did a really nice job. You know, it's a great start to the year, 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.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Okay.

Gary S. Gillheeney, Sr. (President and CEO)

This is Gary, Ryan. I mean, when we think about.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Go ahead, Gary. Yeah.

Gary S. Gillheeney, Sr. (President and CEO)

I'm sorry. The physician fee schedule is coming out in July, you know, we're just being cautious that we wanna make sure that if there's, you know, any disruption to market confusion or anything, we're not expecting anything specific, but sometimes there can be confusion. We help our customers get through that, we're just waiting, you know, maybe cautiously to see how that all plays out and more.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

That's very helpful, Gary. To that point, you know, we obviously watched the physician fee schedule closely to see kind of how CMS is posturing and what their, you know, what the rates are. Just, you know, the 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, you know, if I recall, you were expecting that to moderate into the second quarter. And again, appreciate you may not know what CMS will do, but, you know, as of right now, what's your current thinking around some of the dynamics that have, or, you know, the forces that have taken advantage of the lack of transparency on that fee schedule?

Gary S. Gillheeney, Sr. (President and CEO)

We're seeing actually on a regional basis some improvements, and some of that is just the effectiveness of our national launches, working through, you know, 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. 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. That's kinda what's built into our guidance.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Very helpful. I'm gonna keep rolling here if I may, just a couple other questions for me. Number one, Gary, I think I heard you, high teens growth in the outpatient setting. What was the growth in the physician office? I think you called it out.

Gary S. Gillheeney, Sr. (President and CEO)

Yeah. It was high single digits in the accounts.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

High single. Okay. You know, to that point, you know, 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 are you seeing this quarter? Is it, you know, are we seeing any improvement, just broadly speaking, in the market?

Gary S. Gillheeney, Sr. (President and CEO)

We clearly have seen improvement in the first quarter. I think that the normal seasonality that we've typically seen from Q4 to Q1 is significantly less. We're seeing, you know, 20% unit growth across our portfolio. Virtually all of our major brands, as a brand, have moved forward and even our, you know, 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 on PuraPly. We're seeing, you know, definitely, more patients being treated, more units being applied. We're adding more accounts than we even expected. Definitely see some positive trends. We'd like to see those trends continue.

Again, we're being a little cautious, perhaps, as we wanna see that trend continue, and we think it will. Right now, there's definitely some strength in the market.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Okay. Last one for me, and I'll hop back in the queue. You know, on ReNu, obviously a lot of good milestones coming. In conjunction with that, I guess I wanna ask, if the FDA says you don't have to do a second phase III trial, excuse me, do you have a sense of what you would save in cost for that? As I think about that in the context of, say, your adjusted EBITDA guidance, you know, could that prove to be upside to that guidance? You know, maybe what are you factoring in there for the cost of a secondary trial that begins later this year?

Gary S. Gillheeney, Sr. (President and CEO)

I know Dave, if you'd.

David C. Francisco (CFO)

Yeah. I mean, obviously, Ryan, the trials are significant. If we're able to only go with the two we've got so far and skip that second phase III, it would be a significant change in the financial profile going forward over the next couple of years.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

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

David C. Francisco (CFO)

It is.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

as having to proceed forward. Yeah. Okay.

David C. Francisco (CFO)

It is. We expect that. Yeah. Of course, it's a, you know, it's a couple of years for the entire amount. We talked about the first patient enrollment at the end of Q3. It's back-end loaded, the cost in this year. More of that would spill in 2024. Yeah.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Yeah. Makes sense. Okay. I'm gonna wrap up there, but really good quarter tonight, guys.

Gary S. Gillheeney, Sr. (President and CEO)

Thank you, Ryan.

David C. Francisco (CFO)

Thanks, Ryan.

Operator (participant)

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

Gary S. Gillheeney, Sr. (President and CEO)

Thank you.