Organogenesis - Q2 2023
August 9, 2023
Transcript
Operator (participant)
Please stand by. Welcome, ladies and gentlemen, to the second quarter of fiscal year 2023 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.
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, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws. This call will also include references to contain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to those as 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 in the investor relations portion of our website. I would now like to turn the call over to Mr. Gary S. Gillheeney, Sr., Organogenesis Holdings President and Chief Executive Officer.
Sir, please go ahead.
Gary S. Gillheeney, Sr. (President and CEO)
Thank you, operator, and welcome everyone to Organogenesis Holdings second quarter of 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 second quarter 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 second quarter financial results, our balance sheet, and financial condition at quarter end. I will then discuss our initial thoughts on the recent Local Coverage Determinations, or LCDs, the related uncertainty regarding our 2023 revenue and profitability outlook, and the steps we are taking to address the reclassification of our products that will be impacted if these LCDs remain unchanged and go effective in September.
We will open up the call for your questions. Beginning with the revenue, for the second quarter, we reported net revenue of $117.3 million for the second quarter, which came in above the high end of the range of the guidance that we provided on our first quarter earnings call, driven by sales of our advanced wound care products at the high end of our expectations and the sales of our surgical and sports medicine products exceeding the high end of our expectations in Q2. Second quarter total net revenue decreased 3% year-over-year, which was driven by a 3% decrease in the sales of our advanced wound care products and a 5% decrease in sales of our surgical and sports medicine products.
Advanced wound care product sales were driven by better-than-expected demand for our non-PuraPly products in the second quarter, with sales of our well-established, highly differentiated PuraPly brand being right in line with our expectations for the period. Importantly, our advanced wound care product sales results exceeded our expectations in a hospital outpatient setting and were in line with our expectations in the physician office in Q2. As expected, we leveraged our diversified portfolio and leadership position in wound care centers and physician offices across the US to increase the number of accounts served in both the hospital outpatient setting and the physician office setting. Additionally, we delivered mid-single-digit growth in units sold year-over-year in Q2, driven by double-digit growth in the hospital outpatient setting. We are proud of the team's execution in Q2 and believe we are navigating the dynamic marketplace effectively.
As discussed, we expected a transitory impact on our growth in sales of advanced wound care products in 2023, driven primarily by the impact of key products in the physician office setting, working through the nationwide launches and recently published ASPs. To date, we are pleased that these national launches have performed better than expected. This gives us further confidence that we have the right strategy to maximize our competitive position as a leader in the advanced wound care market and remain well positioned in the coming years. Turning to an update on our operational progress in recent months. We continue to focus on and invest in expanding manufacturing capacity overall for our product portfolio and pipeline, and specifically for developing manufacturing capability for our Dermagraft and TransCyte products that were previously manufactured in California.
By way of reminder, we are working with development firms to assess building additional manufacturing space at our Massachusetts headquarters and in parallel, are looking for alternatives for 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 of ReNu for the treatment of knee osteoarthritis continues to progress as planned. The efficacy phase of the trial was completed in July, and we continue to expect to achieve the last patient, last visit milestone and complete the trial by the end of the year. We've also made progress with respect to the second phase III study for ReNu. We have received FDA approval for the protocol and to proceed with the second phase III trial.
This will be a 474 subject trial with a design similar to the first phase III trial. Major startup activities are well underway with our current contract research organization and other study operations vendors, and we remain on track for first patient enrollment by the end of the third quarter. We received positive response from the FDA in a Type B Meeting regarding questions we asked relating to the CMC aspects of the ReNu product, including confirmation of the testing approach and the manufacturing of ReNu. Previously discussed, we expect to have a subsequent discussion with FDA regarding the clinical data requirements for the BLA, and we intend to propose 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 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 investigators. This essentially gives us more options in our regulatory strategy. Lastly, I'd like to share a few thoughts on the proposed physician fee schedule for calendar year 2024 that was published in July. We are pleased that the Centers for Medicare & Medicaid Services has acknowledged the concerns raised by stakeholders in the town hall meetings in January of 2023, and is seeking additional input from stakeholders before making any changes to the payment policies for skin substitute. As we have urged on many occasions, CMS should pay for all skin substitutes using the ASP methodology.
Manufacturers are already required to provide ASP pricing information, and as the Office of the Inspector General made clear in its March 2023 report, transitioning all skin substitutes to ASP pricing has the potential to substantially reduce Part B expenditures. We also believe that transitioning skin substitutes to ASP-based payments would improve patient access, enable physicians to prescribe treatment options based on the individual needs of the patient, and provide the best outcomes for patients and the healthcare system. With that, let me turn the call over to Dave.
Dave Francisco (CFO)
Thank you, Gary. I'll begin with a review of our second 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 second quarter was $117.3 million, down 3%. Our advanced wound care net revenue for the second quarter was $110.1 million, down 3%. Net revenue from surgical and sports medicine products for the second quarter was $7.2 million, down 5%. Gross profit for the second quarter was $91 million, or approximately 77.6% of net revenue, compared to 78% last year. The change in gross margin was driven primarily by lower sales volume compared to the prior year period.
Operating expenses for the second quarter were $81.3 million, compared to $82.8 million last year, a decrease of $1.6 million, or 2%. The decrease in operating expenses in the second quarter was driven by a $2.3 million or 3% decrease in selling, general, and administrative expenses, offset partially by a $0.7 million or 7% increase in research and development costs compared to the prior year period. Second quarter GAAP operating expenses included a modest reversal of non-operating items consisting of employee severance and benefits, as well as other exit costs associated with certain restructuring activities. This compares to $0.6 million of restructuring-related charges in the prior year.
Excluding restructuring items and non-cash intangible amortization of $1.2 million in both periods, non-GAAP operating expenses for the second quarter decreased $0.8 million or 1% year-over-year, driven by strong cost management pursuant to our strategy to prioritize investments in areas that enhance our foundation for future growth, including higher clinical study-related spending in support of our ReNu studies. Note, we have a detailed reconciliation of these non-operating and non-cash items in today's earnings press release. Operating income for the second quarter was $9.7 million, compared to $11.9 million last year, a decrease of $2.2 million. Total other expenses net for the second quarter were $0.6 million, compared to $0.8 million last year, or a decrease of $0.2 million.
Net income for the second quarter was $5.3 million, compared to $8.7 million last year, a decrease of $3.4 million. Adjusted net income in the second quarter was $6.1 million, compared to $11.3 million last year, a decrease of $5.2 million. As a reminder, adjusted net income is defined as GAAP net income, adjusted to exclude the effect of amortization, restructuring charges, GPO settlement fees, and resulting income taxes on these items. Adjusted EBITDA for the second quarter was $15.4 million, or 13.1% of net revenue, compared to $18.6 million, or 15.3% of net revenue last year. We have provided a full reconciliation of our Adjusted EBITDA results in our earnings press release.
Turning to the balance sheet, as of June 30th, 2023, the company had $89.5 million in cash and cash equivalents and restricted cash, and $69 million in debt obligations, compared to $103.3 million in cash, cash equivalents, and restricted cash, and $70.8 million in debt obligations as of December 31st, 2022. We also have up to $125 million of available borrowings on the revolving credit facility as of June 30th, 2023. With that, I'll turn the call back over to Gary for some closing remarks. Gary?
Gary S. Gillheeney, Sr. (President and CEO)
Thanks, Dave. Before we open up the call to your questions, I want to share some initial thoughts on recent developments in the area of Medicare reimbursement and coverage. On August 3rd, Local Coverage Determinations, or LCDs, were published by three Medicare Administrative Contractors. The LCDs address skin substitute grafts, cellular and/or tissue-based products, or CTPs, for the treatment of diabetic foot ulcers and venous leg ulcers in the Medicare population. Specifically, the LCDs require that a covered product be a skin substitute and be legally marketed. More than 130 products have been identified as not covered in these MACs' jurisdictions, including five of Organogenesis commercially produced products. Our PMA-approved products, Apligraf and Dermagraft, remain on the list of covered products.
We believe that the five commercialized products that were listed as not covered were improperly excluded from the list of covered products. We are engaging with all relevant parties to move these products to the covered status in advance of the effective date of these LCDs, which is September 17, 2023. The recently published local coverage determinations from Novitas, First Coast Services, and CGS to limit coverage for treatment of diabetic foot ulcers and venous leg ulcers to include only Apligraf and Dermagraft, presents a significant amount of uncertainty regarding the revenue outlook for these products in these regions. Further uncertainty remains as it relates to potential impact on demand for our products when used for the treatment of DFUs and VLU wounds. As such, we are withdrawing the fiscal year 2023 guidance previously provided on May 10, 2023.
We believe that the five products that were listed as not covered were improperly excluded, and we are engaging with all relevant parties in advance of the effective date of these LCDs. We intend to provide further information at the appropriate time in the future. With that, I'll turn the call over to the operator to open up the call for questions.
Operator (participant)
Thank you, sir. If you'd like to ask a question, please signal by pressing star one one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star one one. Our first question will come from Ryan Zimmerman of BTIG. Ryan, your line is open.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay. Can you hear me okay?
Gary S. Gillheeney, Sr. (President and CEO)
Yes, we can, Ryan.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
All right, great. Gary, let's start with the LCDs. I, I think you're gonna have to, you know, give investors more color about what's going on here, given the withdrawn guidance. What I, what I first wanna know is, why do you believe they were improperly excluded? What can you share with everyone to suggest that they were improperly excluded? The second question as part of this, and there's gonna be a few here, but, you know, you're withdrawing the guidance. I, I recognize there's uncertainty, but, you know, you need to help people understand what is the payer mix of your revenue base? How much exposure do you have to Medicare? How much exposure do you have to three MACs?
If we can start to break that down, I think we can at least, you know, kind of excise the full risk, from, from this, this change.
Gary S. Gillheeney, Sr. (President and CEO)
Sure. Let me start, Ryan, and then Dave can jump in. The reason why we believe that we were improperly excluded is there's two requirements, primarily in the draft guidance, as well as in the final guidance. Is one is that your products are a skin, and we clearly have all of the evidence and have provided all of the information that's regarding skin substitutes. We clearly, our products are skin substitutes, and we believe we meet the definition easily as it relates to a skin substitutes. I mean, that is what our products are. That's how they perform. They provide a scaffold for healing. They are not removed. They stimulate the wound for healing through cell migration and growth.
That hurdle, which was not identified necessarily in the pre or the draft ruling at all as a requirement, it was not. It's one that kind of showed up in the final draft, which is a procedural problem, but we'll talk a little bit about the procedural problems later. Second is that your products are legally marketed, that you meet the FDA requirements to be on the market. Clearly, all of our products meet the FDA requirements to be legally marketed. We are a skin substitute. That's a hurdle that we feel very strongly we can overcome, and we are legally marketed. Obviously, all of our products are legally marketed. This is an error.
It's clearly an error, in our opinion, and that we will take any and all action to move these products onto the covered list. We will, number one, engage directly with the MACs to inform them of the errors that we believe they've made. We're also preparing a legal memo that we'll be sending to CMS, explaining the errors and all of the process issues and procedural violations that we believed took place in implementing this, this policy. We feel very good, and we're optimistic that our efforts will resolve these coverage issues based on the strength of our arguments, that our products clearly meet the characteristics of a skin substitute, and that we are legally on the market. Dave, you wanna comment about?
Dave Francisco (CFO)
Yeah, sure, Ryan. Obviously, it was a really difficult decision for us to suspend the guidance here. You know, particularly with, as you've seen, a strong H1, you know, it was good in Q1, good in Q2, and we had good momentum in the business, and frankly, before last Thursday, expected to reaffirm our full year guidance today. Unfortunately, what's happened is this, as Gary mentioned, the final LCD has really introduced, you know, a high level of uncertainty around, you know, the, we're confident in our ability to address this, but the timing of that is unclear. That impact to revenue and profitability is unclear at this point. That's why we took out guidance.
As far as, you know, kind of, framing it up, you know, we're not going to disclose how much revenue we do in those MACs, but there is a subset of that revenue that's particularly related to DFUs and VLUs, and our estimate in that arena is about for the first half of 2023, was about $35 million-$40 million. I hope that helps.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
That was, just to be clear, that $35 million-$40 million is what you did in DFU and VLU of the five products that were impacted across your global revenue, not constrained to those MACs. I just, I wanna be crystal clear here, Dave, so that people understand.
Dave Francisco (CFO)
Yes, sure.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
They can kinda frame this up.
Dave Francisco (CFO)
Those are the products that are impacted in those MACs related to DFUs and VLUs.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay, that's the first half. Conceivably, $70 million-$80 million, you know, is coming out over the next four quarters, and in a worst case scenario environment.
Dave Francisco (CFO)
That's correct, in a worst case scenario, although, as Gary pointed out, we have a very strong argument against that, so.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Yeah.
Gary S. Gillheeney, Sr. (President and CEO)
I mean.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay.
Gary S. Gillheeney, Sr. (President and CEO)
There's also... I mean...
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Yeah
Gary S. Gillheeney, Sr. (President and CEO)
If you think about it, Ryan, if I could just. Apligraf is obviously still approved.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Yeah.
Gary S. Gillheeney, Sr. (President and CEO)
Apligraf, in, in these markets, if you think about the other restrictions of the LCD, which is for application. Apligraf, as a result of this, assuming the four applications stand, in my opinion, has significantly more value than it ever has in these LCDs. If you only have four applications...
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Right
Gary S. Gillheeney, Sr. (President and CEO)
To solve this wound, Apligraf is the best product in wound care, the only product with-.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Mm-hmm
Gary S. Gillheeney, Sr. (President and CEO)
PMA approval for DFU, VLU. If you look at the two pivotal studies that we have, the average number of units per patient was 3.6.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Yeah.
Gary S. Gillheeney, Sr. (President and CEO)
If you look at.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Right
Gary S. Gillheeney, Sr. (President and CEO)
We have a 14,000 patient, retrospective study. For all wounds, the average is 2.5. If, if a clinician is looking at a DFU and VLU and has to solve it with four, I would argue that Apligraf should be the first product they consider in all of these MACs. The other thing that you need to consider as well is, PuraPly is also used above the knee. In these MACs, we still have PuraPly sales above the knee, as well as VA's critical access hospital. You know, the number Dave gave you clearly is the correct number, but, you know, going forward, there are other mitigating factors that, you know, we would be pushing pretty hard if in-
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay
Gary S. Gillheeney, Sr. (President and CEO)
A worst-case scenario.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay, I wanna, I wanna.
Dave Francisco (CFO)
Just to be clear.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Yeah. Yeah.
Dave Francisco (CFO)
I'm sorry, just to be clear, 'cause I know you really wanted some clarity on that, but the 35-40, you multiply that by 2, that's for 2024, if it's the worst-case scenario, and this doesn't get resolved. Obviously, it's only four months in the back half-
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Well-
Dave Francisco (CFO)
Is the way we talked about that.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Right. That's a, that's a good point, and, and, you know, you'll have some, obviously you'll lap it by September of next year.
Dave Francisco (CFO)
That's correct.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
I can hear you. That's helpful. A couple follow-ups here, I'm gonna keep rolling just because I think people wanna understand this clearly. What is your ability or confidence, Gary, to swap out some of those sales of Affinity and PuraPly to Apligraf and Dermagraft? I mean, given that you did, you know, suspend marketing or manufacturing, excuse me, of Dermagraft, and, like, you know, if, if we're, again, trying to size up risk, how much can you get back through substitutions of your existing products if these dynamics hold?
Gary S. Gillheeney, Sr. (President and CEO)
We're still working through that. I'll let Dave comment if he has any more, any more color. Obviously, shifting our share of voice, shifting our focus to Apligraf and PuraPly above the knee would be a major area of reallocation of time and resources. We're going through that process now, but I, I can't give you an exact number, and Dave...
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay
Gary S. Gillheeney, Sr. (President and CEO)
I don't know if you have any more color, but we clearly expect both, above-the-knee sales of PuraPly and Apligraf sales to go up.
Dave Francisco (CFO)
Yeah, I mean, as, as Gary mentioned, I mean, we just found this out on Thursday morning, so we're still working through some of this stuff. Clearly, as, as Gary mentioned, you know, there's other MACs that are covering our products above the knee in these existing MACs that we're talking about.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Mm-hmm.
Dave Francisco (CFO)
To Gary's point about Apligraf being the first choice.
Gary S. Gillheeney, Sr. (President and CEO)
You know, we really have a fair amount of capacity opportunity here within our existing facilities, probably north of 30%, to increase that capacity without any, you know, with minimal CapEx requirements. You know, to the extent that that demand starts to, to flow in from a swap-out perspective, you know, we certainly have the opportunity to, to capture that demand. I think also, as you mentioned, just, you know, redeploying resources in different places, as we've talked about before, that, you know, share of voice is important to us, given the strength of our commercial team.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay, last one for me. I'll hop back in queue. You know, these proposals came out in late 2022, if I'm not mistaken. You know, the question is kind of, to what extent did you have an idea that this was potentially coming? You know, what drove the decision for them to just, you know, to publish now? You can kind of just, you know, give us some context around kind of how this came about. It, it seems as if, you know, maybe it was caught off guard.
Gary S. Gillheeney, Sr. (President and CEO)
Sure. You're correct. You know, the draft ruling came out over a year ago, and then they amended it. We responded to the draft proposal. In that draft proposal, they were looking for FDA compliance, that you are, you know, legally marketed, that you have FDA approval or clearance for the products that you have. PuraPly, you know, our 510(k) product, we obviously have a 510(k). It's been cleared. We provided that information. That product historically was called FortaDerm, and we thought there was some confusion around which 510(k). We provided all of that information and felt very comfortable with PuraPly.
Again, regarding the other products, you know, we provided the FDA regulations and guidance from the website, which were the requirements for the 361s, and we met all of those requirements. We provided, you know, the information. PuraPly looked like a pure error to us, and I think it, it perhaps may have been. We felt very comfortable that what we provided, as well as the comments that we submitted in May of 2022 and in November, and the town hall meetings at every one of the MACs, that we felt pretty comfortable that there really wasn't gonna be an issue for us. Now we find out that, well, we're not a skin substitute in their mind, and they somehow misinterpreted the data and brought skin substitute requirements into the discussion, which I believe, for the first time.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay, I'm gonna hop back in queue.
Gary S. Gillheeney, Sr. (President and CEO)
That was a surprise.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Thank you.
Gary S. Gillheeney, Sr. (President and CEO)
Sure, Ryan. You're welcome.
Operator (participant)
As a reminder, to ask a question, please press star one one on your touchtone telephone. Again, please press star one one for any questions. And one moment for our next question. Our next question will be coming from Drew Ranieri of Morgan Stanley. Your line is open.
Drew Ranieri (VP of Medical Technology Equity Research)
Hey, Gary, Dave, thanks for taking the questions.
Gary S. Gillheeney, Sr. (President and CEO)
Okay.
Drew Ranieri (VP of Medical Technology Equity Research)
Maybe just a couple more. Hey, maybe just a couple more following on Ryan's line of questioning there. You kind of touched on the, the revenue implications for the or sizing the risk that you, that you see. Can you maybe hit on the profitability impact here? I know it's, there are a lot of moving pieces here, but could you just kind of help us think, think about that side of the equation as well?
Gary S. Gillheeney, Sr. (President and CEO)
Yeah, absolutely. I mean, it's one of the reasons why, again, you know, we're, it's this a lack of clarity on the revenue and also the profit. You know, from a gross margin standpoint, that'll be predicated on the amount of volume and the mix shift that will happen within the business. Again, you know, we kind of identified this again last Thursday morning, so some challenges from that standpoint. I'd say on the cost side, though, you know, we continue, as always, we'll be prudent in any investments that we make, and, you know, particularly with the current revenue headwinds. We're looking at all those components there, and obviously, as we've done in the past, we'll do everything in our power to, you know, preserve profit as we go forward.
Drew Ranieri (VP of Medical Technology Equity Research)
Got it. With the September 17th deadline, under kind of like the worst-case scenario, and it kind of fully takes effect, what options do you have, looking ahead, to maybe change the rule over time? Or, like, how, how permanent could this be? Would it just be a year, and you can revisit, or just any kind of timeframe around, around that?
Gary S. Gillheeney, Sr. (President and CEO)
I mean, I'll, I'll start. There really is no specific timeframe. You can request through CMS, which we will, for the LCD to be rescinded. You could also request through CMS to have perhaps the articles changed. There's been precedent for that as well, to my understanding. You also can, you know, address it directly with the LCDs. Then once issued, once it becomes effective, you can ask for reconsideration after that 45-day period, to reconsider the entire LCD. At any time, you can request a change in the LCD article or go to CMS if you believe there was actually an issue in how it was implemented. There are no specific timelines on when they have to respond, though, Drew.
That's always a, a bit of a challenge, but you do have the opportunity to go both to CMS and to the LCDs to try to get a rectification of a, of a mistake or, or an error.
Drew Ranieri (VP of Medical Technology Equity Research)
Got it. Okay, Maybe just to shift gears a bit, and Gary, you touched on PFS coming out with the proposal, and it doesn't seem like there really is going to be a meaningful change this year, obviously. Heading into this LCD event, can you maybe just talk about, like, what expectations you were seeing in the business now that the PFS rule was a little bit more benign than many kind of expected? I guess I'm just trying to get a sense of, like, the. You have this event on the LCD side, but just help us maybe better understand, too, what you're seeing on the underlying business and, and maybe what your expectations were around there. Thanks for taking the questions.
Gary S. Gillheeney, Sr. (President and CEO)
Well, sure, and I'll let Dave jump in. Clearly, as Dave mentioned, you know, the trends in the business were strong. First quarter was strong, second quarter was strong. We beat the high end of our guidance. We were ready to reconfirm guidance. Obviously, we had this issue that brings some doubt into the last quarter. The business has been strong. Account additions have been strong. Our national launches of our products that have become published, which is part of our strategy, have exceeded our expectations. We don't see as much in the way of, you know, staffing issues. We're starting to see some improvement in staffing and census, you know, in both the office as well as the outpatient setting. Good trends for the business for sure. Dave, jump in if you-
Dave Francisco (CFO)
Yeah, I mean, I think you hit them all, Gary, but I absolutely agree. I think the first half was really strong for us. It was definitely, you know, in excess of our expectations on the top line. Again, to Gary's point, good account growth as well, which is the, you know, the backbone of the demand profile for the business, and, you know, good flow-through on the performance as well. We've been very pleased. As Gary mentioned, too, you know, the national launches that we were, you know, concerned about through that transitionary period has been, you know, a lot stronger than we had anticipated.
We had a lot of momentum, you know, coming out of Q2, and as Gary mentioned, I think I mentioned it earlier, we were very, you know, bullish on, you know, reaffirming the guidance as we go forward. You know, this obviously event occurred on, on Thursday, so.
Drew Ranieri (VP of Medical Technology Equity Research)
I, I, I lied. I have one more question, or one more, one more topic. Apologies, thank you for that. Maybe just on the surgical business, surgical and sports med, and with a competitor kind of being in recall right now, can you maybe talk about some of the trends you are seeing in that business and maybe what your expectations are to maybe capture incremental share? Just on ReNu, sorry to pile on here, but just to make sure I heard you correctly, the last visit milestone, you're still expecting year-end 2023 for the trial. Can you remind us what you're thinking in terms of data readout for that or any publication strategy around ReNu for the first phase III? Thanks for taking the questions.
Dave Francisco (CFO)
Yeah. Drew, I'll start on the surgical. It did exceed our expectations in the quarter, you know, good performance there. I think, you know, obviously with some opportunity there with that recall, you know, we're still in a kind of a rebuild mode as we, you know, lost some of the products in bone fusion, you know, back in the midpoint of 2021. You know, therefore, we really don't have the significant infrastructure yet to take advantage of a change in the marketplace like that. We continue to look for opportunities. I think it opens doors, but didn't get a lot of traction in Q2. Again, better than what, what our expectations were in the period.
Gary S. Gillheeney, Sr. (President and CEO)
Yeah, regarding the ReNu trial. Yeah, last patient, last visit at the end of the year. You know, we're rolling into the second trial, so we don't have anything this year as it relates to readout or an efficacy readout. There, there is a designed in the current trial an efficacy readout, I believe, in the first half of next year. Then, once that, that information is available, you know, we'll disclose anything that's, you know, well, in any way, unblind the study, but that could be helpful to investors.
Drew Ranieri (VP of Medical Technology Equity Research)
Got it. Thank you.
Gary S. Gillheeney, Sr. (President and CEO)
Sure. Thanks, Drew.
Operator (participant)
One moment for our next question. Our next question is a follow-up from Ryan Zimmerman of BTIG. Your line is open, Ryan.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
I'm back. I just, I just couldn't get enough. I just wanna follow up on, on the prior questions. If I'm doing the math right, Dave, you know, it's an impact of four months. And if you're running at $35 million-$40 million for the first half of the year, you know, simple math would suggest it's something like a $25 million impact in the last four months of the year. One, is that the right way to think about what this headwind could be?
Dave Francisco (CFO)
It is, Ryan. The only thing I'd mention is, it's obviously, there's a little bit of seasonality between the first half and the second half.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Yeah.
Dave Francisco (CFO)
It might be a little bit north of that, but outside of that, you know, that's, that's the way to think about it.
Gary S. Gillheeney, Sr. (President and CEO)
I mean, the other thing, just from a market perspective, there's a lot of misinformation and a lot of noise in the market already regarding the change, and that's creating some confusion. Whenever there's confusion, you've heard us talk about this often, whenever there's a reimbursement change or even perhaps a threat of a change, the market reacts, and things start to slow down a little bit. There's always that one component that we, we try to you know, assess when we come up with these numbers, but that's just. To be fair, that's also an issue that we have.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
The second question is, just the products that are excluded are exclusively for DFU and VLU. You know, looking at these proposals or, excuse me, these finalized LCDs, I mean, you're still selling PuraPly in those given MACs for anything above the knee. Just kind of what's the exposure in your mind for those cases, or is that clearly not in the scope of these LCDs?
Dave Francisco (CFO)
I mean, it's, it's our understanding, and I think, it's most folks understanding, that it's only DFU and VLU. There's been nothing in these LCDs, either in draft or in final form, that have indicated, other than that, in my opinion.
Ryan Zimmerman (Equity Research Analyst in Medical Technology)
Okay. Very helpful. Thank you.
Dave Francisco (CFO)
Sure.
Gary S. Gillheeney, Sr. (President and CEO)
Yes. I mean, in closing, you know, this, in our opinion, was clearly an error, and we are aggressively going after every avenue to get this rectified. We will update you, when appropriate, if anything changes. Thank you very much.
Operator (participant)
Thank you. Again, we're showing no remaining questions. This does conclude today's conference. Thank you for your participation.