Organogenesis Holdings Inc (ORGO) 2021 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2021 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 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 and 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 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. Reconciliations of these 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, Sr., Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and welcome, everyone, to Organogenesis Holdings Third Quarter 2021 Earnings Conference Call. Today, I'm joined on the call by our Chief Financial Officer, Dave Francisco. Now let me start with a brief agenda of what we'll cover during our prepared remarks today.

I'll start with an overview of our financial performance in the third quarter, including a discussion of the key drivers of the strong revenue growth and profitability our team delivered in Q3. After my opening remarks, Dave will provide you with a more in-depth review of our third quarter financial results and the updated guidance for 2021 that we updated in this afternoon's press release. And then, we'll open up the call for questions.

Beginning with a review of our third quarter revenue performance, I'm pleased to report that we delivered another quarter of strong performance despite a tougher than expected operating environment. During the quarter, we reported revenue growth of 13% year-over-year to $113.8 million, driven by 19% growth of our Advanced Wound Care products, which offset a 41% decrease in the sale of our Surgical & Sports Medicine products.

As expected, our Surgical & Sports Medicine results reflected the headwinds for our ReNu and NuCel product lines, following the expiration of the FDA enforcement grace period for those products, which ended on May 31st of this year. Excluding net revenue from these products, our net revenue increased 20% year-over-year on an adjusted basis in the third quarter. A full reconciliation of our non-GAAP adjusted net revenue to GAAP net revenue is included in our earnings release.

Our performance in Q3 continues to reflect our strong execution against our key pillars of our growth strategy, which includes leveraging our comprehensive and differentiated portfolio of products, diversifying our revenue sources across multiple sites of care and physician specialties, and leveraging our broad commercial reach.

Let me provide more color on how each of these long-term drivers of growth contributed to our revenue performance despite the tougher operating environment in the third quarter. First, regarding the strength of our portfolio, we have a broad portfolio of products across the continuum of wound care with a unique customer value proposition through a combination of our PuraPly brand, which is the only skin substitute with purified collagen and PHMB, a broad spectrum antimicrobial. Our amniotic portfolio was the only fresh amniotic membrane on the market in our PMA approved products for VLUs and DFUs.

Our sale of PuraPly products increased 39% in the quarter. This growth was driven by strong utilization from existing customers and a contribution from new customers. Excluding the expected loss of ReNu and NuCel product lines, sale of our amniotic products were essentially flat in the third quarter and the sale of our PMA and other products increased 14% year-over-year in Q3.

Second, we continue to diversify our revenue by expanding into new physician specialties and multiple sites of care to better position the company for sustained long-term growth. Additionally, we continue to leverage our Organogenesis physician solutions platform to further penetrate the office market. And as a result, we continue to expand the number of customers and customer accounts in the office channel, and we're experiencing increased utilization of our products from existing customers. Lastly, on enhancing our commercial reach, we continue to make significant investments to grow our sales force, and we believe our team of 330 direct sales representatives represents a key competitive advantage for Organogenesis.

With respect to the overall operating environment in the third quarter, as we highlighted on our Q2 call, we expected a measure of softness in Q3 growth trends as a result of the seasonality we typically experience. And although we expected to see steady improvement in COVID-related headwinds as we moved through the second half of '21, we began to see more COVID impacts in July and in early August in key areas of the country, and we were monitoring it very closely. We ultimately did experience a tougher than expected operating environment in Q3, as health care facilities and COVID hotspots around the country implemented restrictions on access, which negatively impacted patient consultations, treatments and elective procedures.

Notably, our commercial strategy in recent years has resulted in a broader diversification of our revenue, specifically less exposure to acute care and outpatient settings, which historically have experienced greater COVID-related headwinds. However, in the third quarter, we experienced the spill-over of these COVID related headwinds in the office setting which has, in the past, been a little more resilient.

Our strategic initiatives focus on diversifying our revenue and leveraging our strong product portfolio and allow us to drive 20% growth on an adjusted basis in the third quarter, despite tougher operating environment. We are encouraged by the continued expansion of our customer accounts in the office channel and the growth and utilization of our products from existing customers. That said, the unexpected COVID headwinds had a material impact on our full commercial launch of Affinity during the quarter.

Staff shortages, increased restrictions and limitations on access challenge our ability to engage with new customers, impacting the adoption of our new novel technology and ultimately had a material impact on sales for our amniotic products in Q3. As a result of these challenging headwinds, as we've done in the past, we successfully leveraged our diverse portfolio and drilled better-than-expected sales in our PuraPly brand.

To recap the key takeaways for the quarter, we delivered another quarter of strong growth against a difficult comparison in the prior year and impressive financial performance, particularly with respect to our strong operating cash flow generation in the period. We ended the quarter with more than $100 million in cash on the balance sheet, and our team executed well despite the tough environment we experienced. And we made great progress towards our strategic initiative. Long term, we will continue to lead this space launching highly innovative and highly efficacious products, as we deliver on our mission to provide integrated healing solutions that substantially improve outcomes and reduces the overall cost of care.

One more item I'd like to address before I turn the call over to David; we've had recent -- recently, we've had several inquiries regarding Medicare and not having a published rate for affinity in the fourth quarter. As part of our strategy to grow the brand nationwide, in Q1 of this year, we voluntarily reported our ASP for Affinity, and we're very pleased to receive a published ASP for Q3.

Our Q4 ASP submission was impacted by a filing error, which initially resulted in an incorrect rate issued by CMS and ultimately resulted in Affinity not having a published rate for the fourth quarter. However, we are confident that the nationally published rate will be reinstated on January 1, 2022, and contrary to some speculation in the market, Affinity continues to be covered and reimbursed by Allmax in the fourth quarter.

With that, I'd like to turn the call over to David to review our financial results in the third quarter, our balance sheet and financial condition and our updated guidance.

Thank you, Gary. I'll begin with a review of our third quarter financial results. Unless otherwise specified, all growth rates referenced during our prepared remarks are on a year-over-year basis. As Gary mentioned, we are pleased with the strong revenue growth in the quarter, given the challenging environment as well as the prior-year comparable.

Net revenue for the third quarter of 2021 was $113.8 million, up 13%. And normalizing for the loss of ReNu and NuCel, we grew adjusted net revenue by 20%. Our Advanced Wound Care revenue for the third quarter of 2021 was $107.3 million, up 19%, driven by our expanded sales force and increased adoption of our PuraPly line extensions launched in the second half of 2020.

Revenue from Surgical & Sports Medicine products for the third quarter of 2021 was $6.4 million, down 41%, driven by the impact of sales of our ReNu and NuCel products, which we stopped marketing after May 31, 2021 due to the expiration of the FDA's enforcement grace period. Revenue from PuraPly products for the third quarter of 2021 was $56.9 million, up 39%. As Gary indicated earlier, we are pleased with the continued strong performance from the PuraPly brand, as sales have increased 33% year-over-year over the first 9 months of 2021.

Regarding our commercial footprint, we ended the quarter with 330 direct reps and expect to achieve our goal of ending the year with 340 direct representatives compared to 300 as of December 31, 2020. The gross profit for the third quarter of 2021 was $87.6 million or approximately 77% of revenue compared to 77% last year.

Operating expenses for the third quarter of 2021 were $71.3 million compared to $55 million last year, an increase of $16.3 million or 30%. The increase in operating expenses in the third quarter was driven by an $11 million increase in selling, general and administrative expenses and a $5.2 million increase in research and development costs compared to the prior-year period.

The year-over-year increase in selling, general and administrative expense was primarily due to a $4.8 million increase related to additional head count, primarily in our direct sales force, and increased sales commissions due to the increased sales, a $2.3 million increase in marketing and travel expenses as compared to the low prior-year comparable amidst COVID-related travel restrictions in the third quarter of 2020.

Third quarter 2021 selling, general and administrative expense also included 3 items that did not impact our prior-year results, a $1 million of restructuring costs associated with the closing of the La Jolla facility, a $1.1 million write-off of certain design and consulting fees previously capitalized related to the unfinished construction work on the 275 Dan Road building and a $0.9 million non-cash benefit related to the change in the fair value of the earn-out liability in connection with the CPN acquisition. The year-over-year increase in R&D expense was primarily driven by an increase in the clinical study and related costs necessary to seek our regulatory approvals for certain of our products.

Operating income for the third quarter of 2021 was $16.3 million compared to an operating income of $22.8 million last year, a decrease of $6.5 million or 29%. Third quarter GAAP operating margin was 14.3% of net revenue. Excluding the aforementioned restructuring costs, write-off of previously capitalized construction expenses and the change in the fair value of the earnout liability, operating margin was 15.4% in the third quarter of 2021.

Total other expenses for the third quarter of 2021 were $3.4 million compared to $2 million last year, an increase of $1.4 million or 71%, driven primarily by a $1.9 million loss on extinguishment of debt related to the repayment of our 2019 credit agreement during the period. Net income for the third quarter of 2021 was $12.6 million or $0.09 a share compared to net income of $20.8 million or $0.19 a share, a decrease of $8.2 million or $0.10 per share.

Adjusted EBITDA was $21.7 million for the third quarter of 2021 or 19% of net revenue compared to adjusted EBITDA of $24.6 million or 24% of net revenue last year, a decrease of $3 million. We have provided a full reconciliation of our adjusted EBITDA results in our earnings release issued this afternoon.

Turning to the balance sheet, as of September 30, 2021, the company had $102.7 million in cash and restricted cash and $83.2 million in debt obligations, of which $9.4 million were capital lease obligations. This compared to $84.8 million in cash and restricted cash and $84.8 million in debt obligations, of which $15.1 million were capitalized lease obligations, as of December 31, 2020.

As mentioned last quarter, we secured a new credit agreement in early August. The agreement provides for a credit facility in the aggregate amount of $200 million, consisting of a $75 million term loan and a $125 million revolving credit facility. The new facility reduces our borrowing costs and enhances our financial flexibility, which, along with our improving profitability profile and related cash flow generation, has well positioned us to continue to execute on our strategic growth initiatives in the years to come.

Turning to a review of our 2021 revenue guidance, which we updated in our press release this afternoon, for 12 months ended December 31, 2021, the company now expects net revenue between 458 and $470 million, representing an increase of approximately 35% to 39% year-over-year as compared to net revenue of $338.3 million for the 12 months ended December 31, 2020. This compares to our prior guidance range of $456 million to $472 million.

The 2021 net revenue guidance assumes net revenue from Advanced Wound Care products between $425 million and $434 million, representing an increase of approximately 44% to 47% year-over-year. This compares to our prior guidance, which called for growth of 44% to 48% year-over-year. Net revenue from Surgical & Sports Medicine products between $33 million and $36 million, representing a decrease of approximately 18% to 24% year-over-year, unchanged from our prior guidance range. Net revenue from the sale of our PuraPly products between $196 million and $204 million, representing an increase of approximately 33% to 39% year-over-year. And this compares to our prior guidance range, which called for growth of 22% to 27% year-over-year.

In addition to the formal revenue guidance, we'd like to provide a few considerations for investors to bear in mind when evaluating our growth expectations for fiscal year 2021. This additional color is intended to help the investment community better understand the assumptions supporting our revenue expectations for 2021.

First, the largest contributor of our total company net revenue in fiscal year 2021 will be sales of our amniotic products, which at the midpoint of our full year total revenue range now assumes amniotic growth of approximately 52% year-over-year in 2021. This compares to our prior guidance range, which assumes at the midpoint of approximately 68% year-over-year and reflects our updated expectations for the timing of our full commercial launch of Affinity.

Second, we expect sales of our remaining non-PuraPly non-amniotic products, which collectively form the group called PMA and Other to increase at the midpoint of the range at approximately 14% year-over-year in 2021. This compares to our prior guidance range, which assumes growth at the midpoint of approximately 11% year-over-year, reflecting better-than-expected performance in the third quarter.

Third, we expect to see only modest improvement in COVID-related headwinds as we move through the fourth quarter. Our guidance now reflects a more challenging operating environment versus what our prior guidance had assumed. However, despite the COVID-related headwinds in the second half of 2021, our full-year guidance reflects the strong growth range of 35% to 39% and remains at the midpoint of our previous guidance of $464 million or 37%.

As detailed on our prior earnings calls this year, our guidance also continues to reflect the expectation of lower year-over-year growth in the second half of 2021 compared to the prior year. As highlighted on previous earnings call, this expectation is driven primarily by 2 factors. First, the strong performance of our Advanced Wound Care business in the second half of 2020. We expect to see our year-over-year growth trends in the second half of 2021 moderate as we lap the 56% growth from the second half of 2020. Second, an estimated $18 million headwind to growth over the last 7 months of 2021 related to the removal of ReNu and NuCel from the market beginning June 1, 2021.

With respect to our expectations for financial performance in 2021, we continue to expect to report positive GAAP net income and positive adjusted EBITDA for the fiscal year of 2021. In addition to our formal financial guidance for 2021, we're providing some consideration for modeling purposes. For the full year 2021 period, we now expect gross margins of approximately 75%, total GAAP operating expenses to increase approximately 27% year-over-year. Note, our 2021 GAAP operating expenses include approximately $5 million of restructuring expenses related to our La Jolla, California facility, of which $2.9 million occurred in the first 3 quarters of 2021.

Non-cash D&A of approximately $10 million, non-cash stock comp of approximately $3.5 million, weighted average diluted shares of approximately $134 million, and we expect full-year 2021 CapEx of approximately $30 million, of which approximately 2-thirds is related to growth and gross margin improvement initiatives. Finally, we expect total interest and other expenses of approximately $9.5 million, as the lower borrowing costs associated with the refinance facilities, partially offset by exit cost expensed in the third quarter of 2021.

With that, operator, I'll turn the call back over to you.

(Operator Instructions) And our first question will come from Ryan Zimmerman from BTIG.

Everyone, appreciate all the color you gave today on guidance and commentary on CMS. I guess starting with guidance for both of you guys, as we think about the recovery into the fourth quarter, you have PuraPly kind of going up, offsetting some of the slower amniotic sales, specifically due to the [Affinity's] delay. And so just help us understand kind of how the wound market is recovering in the fourth quarter and why you should -- we should expect to see stronger PuraPly sales, maybe offsetting some of the other slower areas like Surgical & Sports medicine or amniotics?

Sure. So I mean, the environment really is not improving dramatically. We continue to see the impact of COVID. I think for our PuraPly products, one of the areas that's really helped the product is we have more accounts, more physician specialties. It's a more established brand, and we're able to focus our large sales force on selling that product because of its brand equity and because of the customers we have. So we've been able to drive a little extra growth within those existing accounts and some additional accounts. So it's really the utility of the product and the focus of our sales force. We've done that in the past, and it really had an impact.

Dave, if you have a different opinion?

No, I think that's right. I mean, it's just, as you said, it's a well-established brand, continues to be something that the customers sign a lot of clinical utility in, and we continue to see good growth from that product line.

And just, Gary, to dig in a little further on that, and I have follow-up, but are you seen offsetting the usage of some of the other products -- are you seeing offset usage, I guess, of PuraPly, just given your focus on it relative to potentially other products that are in your portfolio or others? And then I just want to ask a follow-up on Affinity.

Sure. So PuraPly is a very different product. I mean, ultimately, all the products get to a point of healing. So our focus when you're selling Affinity -- excuse me, PuraPly is it's a different focus. It's a different patient. It's a patient earlier on in the process where Affinity is more of a recalcitrant layer in the process. And it's different sites of care. So our sales reps will then focus on a dermatologist or a plastic surgeon office where that product, PuraPly, can be utilized where you wouldn't with Affinity. So it really does expand the use of the product.

There can be some because, ultimately, the objective is to heal the wound. But the type of patient and the sites of care are a little bit different. So we don't expect a significant amount of cannibalization across usage.

Okay, I appreciate that. And then just lastly for me, as we think about Affinity, I mean it's been obviously a subject of investor discussion this quarter. And so, how much of Affinity -- the impact in guidance that you've laid out, how much do you think that, that's due to the delay in rollout versus maybe other factors? And what impact have you seen in the fourth quarter from CMS' error with the Max in terms of utilization? And any color you can provide maybe on what -- kind of their expectation or what they've said or indicated about the plan going forward would be appreciated.

Yes, sure. So CMS has not provided any color. We wouldn't discuss any discussions we have with them, but we do expect to get the rate re-established, as I mentioned. So when we file for a published ASP, when you move to a published ASP, you will have a pause and that's considered in our guidance when you move to that published ASP. And that pause is related to benefit verifications and other changes that happen with the product. So you'll have those types of impacts.

You also have the rest of the country, which is the strategy here, where you're not selling the product where you have the opportunity to sell to the entire country and build the brand more broadly and build a base for long-term growth. So there are changing dynamics. Clearly, when you move to a published ASP, which is again something that we file for and we believe is in the best interest for the long-term growth of the product. So clearly, not being able to get out those new customers in those regions where we haven't sold the product at all has really had an enormous impact.

You get the benefit of those additional regions and you may have some loss in existing regions. But overall, you end up in a better place. But we weren't able to get at those new regions and get out those customers, and that's a major impact on Affinity for the quarter. Dave, would you have anything to...

Yes, I would agree. It's just really all about access and kind of adopting that new technology. So it was really challenging in the period.

Your next question comes from Matt Miksic with Credit Suisse.

Congrats on a really strong quarter in a tough environment. Maybe -- and I apologize, Gary, if I missed it, but just because of the questions and focus around reimbursement, around Affinity and PuraPly, just wondering if you provided -- if you could provide any color on like the trajectory of growth, the cadence of growth in the second and third quarter, and maybe what your expectations are in the fourth quarter. Understanding you don't guide by product like that, but just whether you're expecting things to improve or remain stable? Just anything you'd be willing to share would be helpful. And I have one follow-up.

Sure. So we certainly expect sales of Affinity to improve in Q4. Even with the loss of published ASP, there will be a pause again in October. So we expect to see that, and we did see that. And we're now starting to see the product pick back up once benefit verifications are done and folks understand that the product is still being reimbursed. So we feel like there will be a slight improvement and the product will grow in Q4.

We expect to have published ASP in January, and then we will relaunch the product again in January, and we would expect a pause again when you have a change in your ASP and you now have a published ASP, which is different. There'll be benefit verification process, which normally happens in Q1 anyway as deductibles reset for our customers. So we do expect that there'll be some pause going into Q1, but ultimately we expect Affinity to continue to be a growth driver for the company going forward.

Okay. And then just maybe to understand the value of the product, I know we spent a fair amount of time making calls out to clinicians about the product earlier in our diligence and covering the company over the past several years. And the feedback has certainly been positive, but I thought it might be helpful just for folks to understand, given the array of amniotic products that are out there, just remind us, like what is special about it, where is it used that you maybe would not use a dehydrated tissue amnion or just a little more color on where clinicians really seek it and use it and particularly I guess in the physician channel only at this point?

Correct. So it is unique. It is the only fresh amnion in this space. So it has living cells in the product, similar to many of our other products, that's a part of who we are as living active technology. So when a wound is recalcitrant, meaning it hasn't really closed more than 50% in 4 weeks and the clinician is challenged and they feel an active product like Affinity is really what's needed to jumpstart the wound, that's really the value of the product. It's when you have that wound that's really difficult. And again, the clinician feels an active living type technology would help that wound move on to healing through the proliferative phase, ultimately leads to healing.

The next question comes from Steven Lichtman with Oppenheimer.

Gary, just on the ASP update for the fourth quarter, what -- for January, excuse me, what gives you the confidence that it will be on the next list? I know you mentioned not wanting to talk about any conversation with CMS, but anything you guys have looked at relative to prior situations or any outside consultants or anything to give you that confidence?

Well, sure. We certainly have a lot of outside consultants giving us a lot of confidence that, that would happen. I think it's important to note that we received an ASP, a published ASP, for the quarter. It was just incorrect and in the process of trying to get it correct if we didn't meet the time lines and we weren't able to get the ASP re-established. So it was a filing error and this happens often. But what we've been told by our consultants is the Max will typically reimburse it, and we are seeing that. So that's ended up being accurate. And then you refile it correctly and it will get re-established again. So we have no reason to believe or any reason to believe that it wouldn't be re-established at this point.

Okay, got it. And then relative to COVID, I just want to put a finer point on what you're seeing out there. It sounds like you're seeing pretty steady environment versus what you saw in the third quarter. And what part of your business specifically would see more of an impact versus others? As you mentioned, you've diversified a lot. So certainly, not all. But if you could talk a little bit more color on what's impacted and what you're seeing out there today.

So I mean, our entire business is really impacted. What's troubling is when you don't have access and you're launching a new technology like Affinity, it's challenging because you need multiple meetings, you need training, clinician typically goes through benefit verification, obviously and then a trial period with the product. So there's a lot of access that's required. So anything that's new or new customers are more challenged.

Our existing accounts where we have great brand equity, we have great relationships, we were able to continue to sell and go a little deeper, which helped PuraPly this past quarter. That's really the challenge, is branching out with new technologies into new accounts or new physician specialties when you don't have access.

(Operator Instructions) Next question comes from Danielle Antalffy with SVB Leerink.

This is Erin on for Danielle.

Sure, Erin.

So yes, congrats on the quarter. I just wanted to kind of dive a little bit deeper into the COVID headwinds. I know you mentioned that staffing shortage is creating a challenge. I just was hoping to see if there's any way to quantify what that impact looked like in 3Q? It just seems like this is kind of a larger headwind that could potentially linger. So just wanted to kind of get a sense of how this may impact growth going forward.

Dave, you want to...

Yes, so the third quarter was impact -- we estimate it to be about $4 million. I think as you move into Q4, it's a little bit more difficult to tease it out just because of the components that Gary said about the access. This is a change in dynamics in the launch and how much of this is associated with specific COVID-related -- it's a little bit more challenging to tease out. (inaudible) that.

Yes, it is. But we think it's about $4 million in the third quarter. But we -- that we clearly think that the headwind is going to exist for Q4. And we're battling it and navigating it with our portfolio and our customers. And we also think it could leak into the first half of next year as well based on what we're seeing. So I think -- seeing that as well. Thank you.

And then just on the office channel, obviously the diversification of care setting has helped you power through some of the COVID headwinds. I just wanted to get a sense of how penetrated you are into the potential accounts and how much runway is potentially left in this channel?

So we don't really provide how many accounts, but what I've said before is the channel is large, it's about 12,000 offices. And we figure there's about 6,000 high potential offices. We're not anywhere near penetrating that channel, it's significantly under-penetrated.

We are currently showing no remaining questions in the queue at this time. That does conclude our conference for today. Thank you for your participation.

Thank you.