Organogenesis Holdings Inc (ORGO) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Quarter 2019 Earnings Conference Call for Organogenesis Holdings Inc. (Operator Instructions) 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 may contain forward-looking statements that are based on the current expectations of management and involve inherent risk 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 A1 (sic) [Item 1A] Risk Factors of the company's Form 10-K for the year ended December 31, 2018. 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 certain financial measures that are not calculated in accordance with the generally accepted accounting principles or GAAP. We generally refer to these 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 on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Gary Gillheeney, Organogenesis Holdings' Chief Executive Officer. Please go ahead, sir.

Thank you, Lauren, and welcome, everyone, to Organogenesis Holdings First Quarter 2019 Earnings Conference Call. I'm joined today on the call by Tim Cunningham, our Chief Financial Officer.

Let me start with a brief agenda of what we'll cover during the prepared remarks. I will start with a high-level overview of our revenue performance during the first quarter of 2019. After my opening remarks, Tim will provide you with a more in-depth review of our quarterly financial results as well as an overview of our financial guidance for 2019, which we updated today in our earnings release.

Following Tim's discussion of our financial results and outlook, I will then share some thoughts on why we believe we are well positioned for strong performance in 2019 and solid long-term growth going forward. And then we will open up the call to questions.

We were pleased with our operating and financial performance in the first quarter and believe we're off to a solid start in 2019. We reported total revenue growth of 61% year-over-year, driven by sales growth in our Advanced Wound Care products of 64% and sales growth of our Surgical & Sports Medicine products of 47% year-over-year.

Our revenue growth performance was a direct result of our powerful combination of strategic investments that we've made in expanding our commercial infrastructure in recent quarters and empowering those selling representatives and agencies with our differentiated and comprehensive portfolio of Advanced Wound Care and Surgical & Sports Medicine products.

Our Q1 results also benefited from a full quarter of the recent favorable reimbursement decision for our largest product line, PuraPly. As discussed in our Q4 call, on October 1, 2018, CMS resumed to making pass-through payments when customers use PuraPly products in the outpatient hospital setting and in ambulatory surgery centers. This will continue through September 30, 2020.

Our 61% total revenue growth was driven by 139% growth in sales of our PuraPly products in Q1 as compared to Q1 in 2018. But it's important to recognize that our total growth in Q1 is not entirely related to improving growth trends in PuraPly.

Sales of our non-PuraPly products increased 27% year-over-year in Q1, which reflects the strong execution of our sales force who have been focused on continuing to expand our customer relationships and support their physician customers as they increase the use of our regenerative medicine product portfolio.

With the successful execution of our commercial strategy, we leveraged PuraPly's pass-through advantage to gain new PuraPly accounts, drive customer and clinician adoption of PuraPly deeper into existing accounts and drive sales of our other products into accounts that previously only used PuraPly.

Strong execution from our sales team also drove penetration of our amniotic products into existing and new accounts despite the suspension of Affinity production in Q1 2019.

We also reported stronger-than-expected revenue growth in Surgical & Sports Medicine this quarter, fueled by strong portfolio of differentiated orthobiologic products, including NuCel for bony fusion in the spine and extremities and NuShield for surgical application in targeted soft tissue repairs and the investments we've made in our sales force have led us to a very strong start to fiscal 2019.

Additionally, we grew our customer base across both our Advanced Wound Care and Surgical & Sports Medicine portfolios and continue to build our commercial infrastructure by adding direct sales representatives and independent agencies. Based on our solid first quarter financial results, our expectation for continued strong commercial execution, we have increased our 2019 full year financial guidance.

And finally, we recently announced that we received an Innovative Technology contract from Vizient Inc., the largest health care performance improvement company in the country as part of Vizient's move to value-based care. This is an important expansion of our existing relationship with Vizient. And this new contract provides access to all of their 3,100 hospitals and more importantly, provides them access to our entire portfolio. We are understandably pleased with this decision and believe this contract with Vizient represents both the appreciation of our differentiated portfolio of products and an alignment with our mission, which is to provide integrated healing solutions that substantially improve medical outcomes and the lives of patients while lowering the overall cost of care.

With that, let me turn the call over to Tim, our Chief Financial Officer, for a detailed review of our financial results in the first quarter as well as the review of the fiscal year 2019 guidance. Tim?

Thank you, Gary. I will begin with a review of our first quarter financial results. Revenue for the first quarter of 2019 was $57.1 million compared to $35.5 million for the first quarter of 2018, an increase of $21.6 million or 60.8% from the first quarter of 2018.

Revenue from Advanced Wound Care products for the first quarter of 2019 was $47.8 million compared to revenue of $29.2 million for the first quarter of 2018, an increase of $18.6 million or 63.7% year-over-year.

Revenue from Advanced Wound Care products represented 83.8% of total revenue in the first quarter of 2019 compared to 82.3% in the prior year. The increase in Advanced Wound Care revenue was primarily attributable to additional sales personnel, PuraPly regaining pass-through reimbursement status for the 2-year period effective October 1, 2018, and the continued growth in adoption of our amniotic products.

Revenue from Surgical & Sports Medicine products for the first quarter of 2019 was $9.3 million compared to $6.3 million for the first quarter of 2018, an increase of $3 million or 47.2% year-over-year.

Revenue from Surgical & Sports Medicine products represented 16.2% of the total revenue in the first quarter of 2019 compared to 17.7% in the prior year. The increase in Surgical & Sports Medicine revenue was primarily attributable to the expansion of our sales force and penetration of new and existing accounts.

As of March 31, 2019, we had approximately 245 direct sales representatives, up from 215 at year-end and approximately 155 independent agencies, up from 130 at year-end.

Revenue from PuraPly products for the quarter -- for the first quarter of 2019 was $25.4 million compared to $10.6 million in the first quarter of 2018, an increase of $14.8 million or 139.1% year-over-year.

Revenue from PuraPly products represented approximately 44.5% of total revenue in the first quarter of 2019 compared to 30% of total revenue in the first quarter of 2018.

Revenue from sales of non-PuraPly products increased $6.8 million or 27.3% year-over-year in the first quarter of 2019.

Gross profit for the first quarter of 2019 was $40.1 million compared to $21 million for the first quarter of 2018, an increase of $19.1 million or 91.1%.

Gross profit for the first quarter of 2019 -- gross profit margin for the first quarter of 2019 was 70.3% of revenue compared to 59.1% of revenue for the first quarter of 2018. The improvement resulted primarily from a more favorable product mix in the first quarter of 2019, PuraPly regaining pass-through reimbursement status and to a lesser extent, volume-based manufacturing efficiencies.

Operating expenses for the first quarter of 2019 were $52.3 million compared to $41 million for the first quarter of 2018, an increase of $11.3 million or 27.5%. The increase in operating expenses in the first quarter of 2019 as compared to the first quarter of 2018 was driven primarily by higher selling, general and administrative expenses, which increased to $48.9 million compared to $38.2 million in the first quarter of 2018, an increase of $10.7 million or 28.1%.

The increase in selling, general and administrative expenses is primarily due to additional headcount, primarily hiring in our direct sales force, higher sales commissions as a result of increased revenue and increased marketing and promotional expenses for our products.

R&D expense for the first quarter of 2019 was $3.4 million compared to $2.8 million in the first quarter of 2018, an increase of $0.5 million or 19.4%. The increase was primarily due to additional headcount and additional clinical program spend.

The operating loss for the first quarter of 2019 was $12.1 million compared to an operating loss of $20 million for the first quarter of 2018, a decrease of $7.9 million or 39.3% due to the aforementioned reasons.

Total other expenses, net, for the first quarter of 2019 were $3.5 million compared to $2.5 million for the first quarter of 2018, an increase of $1 million or 41.5%. The increase was driven primarily by a $1.9 million noncash loss on the extinguishment of prior debt obligations following the new $100 million credit agreement with Silicon Valley Bank and MidCap Financial that we closed in March of this year.

Net loss for the first quarter of 2019 was $15.7 million or $0.17 per share compared to a net loss of $22.5 million or $0.35 per share for the first quarter of 2018, a decrease of $6.8 million or 30.3%.

Adjusted EBITDA loss for the first quarter of 2019 was $9.4 million compared to an adjusted EBITDA loss of $17.3 million for the first quarter of 2018, a decrease of $7.9 million or 45.8%.

We have provided a full reconciliation of our adjusted EBITDA results in our earnings release, Form 8-K and Form 10-Q, all of which were filed with the Securities and Exchange Commission this morning.

Turning to the balance sheet. As of March 31, 2019, the company had $30.6 million in cash and $88.1 million in debt obligations, of which $17.4 million were capital lease obligations compared to $21.3 million in cash and $59.3 million in debt obligations, of which $17.7 million were capital lease obligations as of December 31, 2018.

The net change in cash of $9.3 million for the quarter ended March 31, 2019, was driven by $19.1 million of cash provided by financing activities, partially offset by $9.6 million of cash used in operating activities and $0.3 million of cash used in investing activities during the quarter.

Turning to a review of our fiscal year 2019 revenue guidance, which we updated in our earnings release this morning. For the 12 months ended December 31, 2019, the company now expects total revenue of between $249 million and $262 million, representing growth of approximately 29% to 35% year-over-year as compared to total revenue of $193.4 million for the 12 months ended December 31, 2018.

The 2019 revenue forecast assumes revenue from Advanced Wound Care products of between $219 million and $229 million, representing growth of approximately 33% to 39% year-over-year as compared to revenue of $164.3 million for the 12 months ended December 31, 2018; revenue from Surgical & Sports Medicine products of between $30 million and $33 million, representing growth of approximately 3% to 13% year-over-year as compared to revenue of $29.1 million for the 12 months ended December 31, 2018.

The 2019 revenue guidance range also assumes that revenue from the sale of our PuraPly products will represent between $96 million and $103 million of revenue, representing growth of approximately 38% to 48% year-over-year as compared to revenue of $69.8 million for the 12 months ended December 31, 2018.

With that, I'll turn the call back over to Gary. Gary?

Thanks, Tim. Overall, we are pleased with our operating and financial performance in the first quarter and believe we're off to a solid start to 2019.

We've updated our 2019 revenue guidance to reflect the strong growth in our Surgical & Sports Medicine business in Q1. And we are confident in our total growth expectations implied by our full year 2019 guidance. We believe we have several unique strengths that position us well for the future. We are a leader in regenerative medicine space with strong brand recognition, and that brand recognition is getting stronger every day. We are well positioned in large, attractive, growing markets, specifically advanced wound care and surgical and sports medicine. We have a comprehensive suite of products to address the clinical and economic needs, not only of the patients but also of the providers. We have a large and growing body of clinical data and a portfolio of products with FDA and PMA approvals and FDA clearances. We have established robust and extensive customer relationships with hospitals, wound care centers, government facilities, ambulatory surgery centers and physician offices to sell our broad portfolio of products and are experiencing deeper sales in all of those sites of care.

We have established a scalable regulatory commercial and manufacturing infrastructure, and our executive management team has extensive experience in the regenerative medicine industry, posting over a 100 years of collective experience and accomplishments in the space. This experience allows us to operate from a deep understanding of the underlying trends in regenerative medicine and the scientific, clinical, regulatory, commercial and manufacturing requirements necessary to drive success in the industry.

And we look forward to speaking with the investment community in the future and appreciate your interest in Organogenesis.

With that, Lauren, I'll turn it back to you.

(Operator Instructions) And our first question will come from Matt Miksic with Crédit Suisse.

Congrats on a solid start here. So couple of questions about the trends. I mean first, in PuraPly, I know it's early in the year and no one would expect you to kind of run out and raise numbers, but you did raise guidance just a little bit on the top end. But a very strong start for the year on PuraPly, holding the guidance there. Can you help us understand maybe the cadence throughout the year that you're expecting? Or if you're just sort of recognizing the fact that it's early and you don't want to start getting ahead of yourself just on 1 quarter?

Yes. Thank you for that. It is early. It's just the first quarter. And you typically have seasonality that hits the entire business in Q1. So until that seasonality, which really relates to medical deductibles, hospital formularies getting reset, there's a lot of noise. So we typically like to get through the first quarter. We're certainly very pleased with the results we're seeing with PuraPly. And those trends are continuing to improve. But at this point, I think we're just comfortable with the guidance where it is.

Great. Understood. I mean there's a number of questions here, which I'm expecting other folks to kind of get into around sales force and some of the other lines of the P&L and the sales lines. But I have one question, Gary, if I could, just coming out of SAWC. There was some talk, I guess, maybe more so than last year about the prospect of changes to, potentially, good changes, positive changes to the high-price/low-price structure of reimbursement around wound care that's been in place for a while. And I know that the possibility of change has been out there. It seemed to be a little bit more incrementally buzzing at some of the meetings. And I just wanted to get a sense of is there a change in current or is it just more of the same. The folks just kind of are talking about the prospect of changing reimbursement, but your expectations would be helpful there.

Sure. No, I think it's more of the same right now. But you're correct, there's a lot of discussion going on about the bundle, the high-cost/low-cost bundle. And I think most of the conversations are around stabilizing those bundles or on moving to a system over time that would bring more stability to the reimbursement model. So I think those discussions will be going on for the next year or 2. But the direction is, as you said, is more positive, where there'll either be more stability in securing your position in the bundles or looking at a way that CMS can kind of set this and -- set a system up that, leave it the way it is, that will continue to bring stability to the market. So we're participating in those discussions. We think they're positive, but it's more the same -- in my opinion, same this year and most likely next year.

Our next question comes from Ryan Zimmerman with BTIG.

Congrats on a good start there. I want to ask Gary about Sports Medicine a little bit. Looks like you did better than certainly what you were expecting, and subsequently, that was part of the source of the guidance raise, so -- or most of the guidance raise there. So maybe you could help us understand the confidence you have in that business today versus last quarter and what you're seeing in customer interest within Surgical & Sports Medicine. And then I have a follow-up.

Sure. Well, we've added more agencies in the first quarter, which provided a little help, though those agencies take about 9 to 12 months to ramp up. But we're also seeing significant improvement in the existing agencies we have. We've enhanced our training. We've enhanced our direct sales force internally, which manage those agencies. So the level of training and the additional performance we're getting out of the existing agencies are certainly a big part of that. We've also increased the number of customers. So our customer reach has expanded. So we have all of those dynamics working for us, better performance of existing agencies, broader reach, and we feel our training program has significantly enhanced the effectiveness of those agencies. So that gives us continued confidence that our products will continue to do well in the surgery and sports medicine market.

Okay. Fair enough. That's helpful. And then can you just provide some more color around the suspension of Affinity in the quarter? When you expect to have that back in production? And if you can quantify what the suspension may have caused in potential lost sales, at least for this quarter, just so we can have a sense of kind of what that could get back to, potentially, if you want to...

Sure. So our expectation is we have contracted with another manufacturer to manufacture Affinity. And we've also leased a new facility here in Massachusetts that will also have the ability to manufacture Affinity. We expect the new contract manufacturer to start producing product in Q4 of this year but not have the commercial scale until Q1 of 2020. So we're -- our expectation is we'll start manufacturing in Q4 but really won't have enough product until Q1 to really have enough commercial product to release it to our sales team.

Our next question comes from Steven Lichtman with Oppenheimer & Co.

Just a -- first question on Vizient. Just a little more context. Is it a contract with minimums, like the MSA strategy you've spoken about before or more of a license to hunt? And any estimate how big the wound care business is across Vizient?

Yes. There are no minimums, it's really a license to hunt. We do, do business with them today. And this also helps protect the revenue that we have. And it expands the -- our Surgical & Sports Medicine portfolio to all 3,100 hospitals. So that's a huge impact on that business. We're not sure exactly how much Wound Care business is in those 3,100 hospitals, but it's significant. I would guess -- several hundred million dollars' worth of wound care would be a guess in those 3,100 hospitals. It's really impactful in the Surgical & Sports Medicine side because every one of those hospitals has an inpatient, not every hospital has an outpatient setting. So very, very positive for both portfolios but particularly the Surgical & Sports Medicine.

Got it. Gary, that's helpful. And then just secondly on sales force. You started off strong here in terms of new hires in the first quarter. Any update on how many total reps you'd be targeting to add this year? I think you've said 50 to 60, perhaps, this year. Is that still a good number? Or could that maybe go higher based on the earlier results?

That's still a good number.

(Operator Instructions) Our next question comes from Bruce Nudell with SunTrust.

Could you give us some -- the SG&A spend was a little higher than we expected. I know that it's the stated goal to build out the sales force. It makes total sense. But could you give any guidance on adjusted EBITDA for the year?

Sure. Tim, you want to handle that?

Sure. We have, as you know, the interim model out there, and so we're saying our goal is to navigate between now and 2022 to break even. We expect to show modest-some leverage this year, continue to target high 60s for SG&A as a percent of revenue to get there by 2022.

Okay. Great. And I saw the ReNu results at AOS (sic) [AAOS]. And I just wondered if you guys could put that in context because it could be a very large growth driver relative to how you want to cash it and how you're planning to position that product.

Sure. So we're excited about the data that was presented at AAOS. And we've recently locked down the 12-month data and crossover data and are in the manuscript process right now preparing that manuscript. So as you know, we are -- one of the arms in the study is hyaluronic acid. That's a $2 billion market. Hyaluronic acid has about $1 billion of that $2 billion market. So we feel very strong that we have superior results compared to hyaluronic acid. I think that's clear in the study. So we would expect, once approved and once reimbursed, we would have a significant share of that hyaluronic component of osteoarthritis market of about $1 billion. So we will compare ourselves and go head-to-head with hyaluronic acid and superior results. I think it's going to be extremely positive when we launch the product.

And I'd also say though, ReNu is commercial today. As you know, it's not a significant component of our revenue. It's growing over 45% -- above 45% year-over-year without reimbursement and without a significant effort to sell. And the -- we're getting very favorable responses through the clinicians that are using the product and the patients. So the study that we have and the anecdotal information we're getting back from use today is very consistent. So we still feel very strongly about prospects for ReNu.

And our next question is a follow-up from Matt Miksic with Crédit Suisse.

I just -- maybe one on amniotic and one on -- a follow-up on Bruce's question on EBITDA, if it's okay. So if you could -- understanding Affinity is on hold for the moment as you build out the manufacturing capacity, can you talk a little bit about, I don't know, success at the account level or growth or share or any color that you can provide around NuShield, given that it's a little bit differentiated, at least the feedback we've gotten from some of the other products out there? And then of course, the leader in that amniotic space continues to kind of [seat-share] for the moment. And as I mentioned, just one follow-up on EBITDA trends.

Sure. Sure. So our portfolio -- the strength of our portfolio is really being demonstrated at this point as our Affinity customers are now turning to our other amniotic product, NuShield, which is an outstanding product, has 2.5x the growth factors of any other dehydrated product in the market. And it's closest to the natural tissue maintaining all 3 layers of the amnion. So we have been able to convert many of those customers to NuShield or to other products in the portfolio and particularly those that need commercial insurance, Apligraf and Dermagraft, is covered by over 1,500 commercial insurers.

No other skin substitute has the commercial insurance that those 2 products have. So that our portfolio strength has allowed us to continue to sell significant amount of NuShield. Our amniotic growth is over 70% without Affinity. So it does speak to, one, the execution on the sales side, but also the quality of our NuShield product. So we're very excited about both Affinity coming back in Q1 next year and the additional success we're having with NuShield. So both products are part of the future growth of this company for sure.

That's helpful color. And then on EBITDA. Just it seems like you see this trend released in the data that we have in your financials historically of sort of like improvements throughout the year. You did beat on operating income at least by our numbers in the quarter and despite the below-the-line offsets to that. So if we are -- I guess one part of the question is on trends is just should we see this kind of improving EBITDA margin throughout the year? And then is it the right way to think about, say, this year and next year improving EBITDA trends generally offset by, I guess, the PuraPly in the late '20? And then potentially, I guess, the question is around Affinity. Does that -- are there any costs associated with that, that would maybe change the trajectory of the EBITDA margins throughout this year or -- trajectory or level this year or next year?

In Q1 of '19, Matt, OpEx of $52 million reflects the incremental investments we're making to grow the business, expanding the sales force, increased commissions on higher revenue, additional investments in R&D as we talked about in the call. When -- but when you think about 2019 OpEx, we expect quarterly OpEx to increase modestly as we continue to invest. We expect to show some leverage in full year of 2019 and continue to target the high 60s SG&A as a percentage of revenue in 2022 and get to EBITDA breakeven by that target of 2022.

I got you. That's helpful, Tim. Just wondering in -- so Affinity, it sounds like whatever you're doing with Affinity here isn't really affecting your trajectory much, if at all. It sounds like from your comments.

Well, we -- today, we both reaffirmed it raised our guidance.

Thank you. And that does conclude our conference for today. Thank you for your participation.