Organogenesis Holdings Inc. (NASDAQ:ORGO) Q1 2023 Earnings Call Transcript May 10, 2023
Organogenesis Holdings Inc. reports earnings inline with expectations. Reported EPS is $-0.02 EPS, expectations were $-0.02.
Operator: Welcome, ladies and gentlemen to the First Quarter of Fiscal Year 2023 Earnings Conference Call for the Organogenesis Holdings Inc. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the company’s website for replay shortly. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company’s filings with the Securities and Exchange Commission, including Item 1A Risk Factors of the company’s most recent annual report and its subsequently filed quarterly reports.
You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward-looking statements, 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 these non-GAAP financial measures to be 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.
Gary Gillheeney: Thank you, operator and welcome everyone to Organogenesis Holdings first quarter fiscal year 2023 earnings conference call. I am joined on the call today by Dave Francisco, our Chief Financial Officer. Let me start with a brief agenda of what we will cover during our prepared remarks. I’ll begin with an overview of our first quarter revenue results and an update on our key operating developments in recent months. Dave will then provide you with an in-depth review of our first quarter financial results, our balance sheet, and financial condition at quarter end, and our 2023 financial guidance, which we updated in today’s press release, and then we’ll open it up for questions. Beginning with a review of our revenue results for Q1, we reported net revenue of $107.6 million for the first quarter, an increase of 11% year-over-year, which was driven by a 12% increase in the sale of our Advanced Wound Care products, partially offset by a 4% decrease in the sales of our Surgical & Sports Medicine products.
First quarter sales net revenue results came in above the high end of the guidance range we provided on our fourth quarter earnings call, with sales of both our Advanced Wound Care and our Surgical Sports Medicine products exceeding the high end of our expectations in Q1. While sales results, both our prime product exceeded the high end of expectations in Q1, sales of Advanced Wound Care products drove the majority of the upside in the quarter. Advanced Wound Care product sales were driven by better-than-expected demand for both our PuraPly and non-PuraPly products in the first quarter, fueled by the continued strong demand for our well-established, highly differentiated PuraPly brand and the strength in adoption and utilization amniotic technologies.
Importantly, our Advanced Wound Care product sales results exceeded the high end of our expectations in both the hospital outpatient setting and the physician office in Q1. As expected, we leveraged our diversified portfolio and leadership position in wound care centers in physician offices across the U.S. that deliver strong growth in Q1. We Specifically, excluding Dermagraft, our team delivered high teens growth year-over-year in the number of accounts served in the hospital outpatient setting and high single-digit growth in customer accounts in the physician office setting Additionally, we delivered more than 20% growth in units sold year-over-year in Q1. And — and we are proud of the team’s execution in Q1 and believe our ability to deliver results above the high end of our guidance range represents another clear illustration that we have the right strategy to maximize our competitive position as a leader in the advanced on market.
Turning to an update on our operational progress in recent months. We continue — we recently completed the construction and validation activities for our new corporate logistics center at our headquarters in Canton, Massachusetts as well as the completion of additional manufacturing space at our nearby facility in Norwood, Massachusetts. We continue to focus on and invest in expanding our manufacturing capacity overall for our product portfolio and our pipeline product and specifically for developing manufacturing capacity for our Dermagraft and TransCyte products that were previously manufactured in California. To that end, we are working with development firms to assess building additional manufacturing space that our manufacturing headquarters here in Massachusetts.
And in parallel, we’re looking at alternatives for suitable existing manufacturing space within the region. As previously communicated, we expect to have a definite plan by the end of the third quarter. Our ongoing Phase 3 clinical trial for ReNu for the treatment of knee osteoarthritis continues to progress as planned. The efficacy phase of the trial will be completed in July and we expect to achieve the last patient last visit milestone and completion of the trial by the end of the year. In recent months, we’ve also made progress with respect to our second Phase 3 study for ReNu. We are engaging with the FDA on our submission of an IND amendment to conduct the trial, we selected the contract research organization that will conduct certain operational and data management aspects of the trial and assuming a timely approval of the IND, we remain on track with our plan to launch the operational aspects of the second Phase 3 trial by the end of the second quarter of this year with first patient enrolled expected to be at the end of the third quarter.
We also have a scheduled meeting with the FDA in June to discuss the CMC requirements for the BLA for ReNu. We expect to have a subsequent discussion with the FDA regarding the clinical data requirements for the BLA. And as previously discussed, we will propose that the current Phase 3 trial combined with the published 200-patient RCT as valid scientific evidence and sufficient for a BLA approval. As a reminder, our plan is based on our belief that moving forward with the second trial as soon as we hear from the FDA will enable us to leverage the major operational advantages of continuing with the current active investigator site. This plan essentially gives us more options in our regulatory strategy. Lastly, I’d like to share a few noteworthy items related to our continued efforts to engage with clinicians and expand the awareness of our product portfolio’s, clinical efficacy and the value to the health care system.
Organogenesis was a significant contributor at the recent Symposium and Advanced Wound Care Conference or SAWC. This is the primary clinical and scientific conference for Advanced Wound Care. We presented eight posted an abstract with one chosen as the top poster in the clinical research category. We also sponsored five symposium on in workshops to further educate clinicians on Organogenesis portfolio of products. This week, we are presenting an ICR Health Conference in Boston, a comparative effectiveness research study on the use of Apligraf cell therapy in wound. This continues our significant investment in demonstrating the clinical and economic effectiveness of our products with real-world evidence. We’re also pleased with the recent publication of PuraPly antimicrobial clinical study in the wound management and prevention journal.
This exciting pilot study evaluated the effectiveness of PuraPly antimicrobial wounds for which bioburden and biofilm contamination were detected by an advanced imaging diagnostic device. With that, let me turn the call over to Dave to discuss the financial results.
Dave Francisco: Thank you, Gary. I’ll begin with a review of our first quarter financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net revenue for the first quarter was $107.6 million, up 11%. Our Advanced Wound Care net revenue for the first quarter was $100.9 million, up 12% and net revenue from Surgical & Sports Medicine products for the first quarter was $6.7 million, down 4%. Gross profit for the first quarter was $81 million or approximately 75.3% of net revenue compared to 74.2% last year. Change in gross margin was driven primarily by increased sales volume in Advanced Wound Care products as well as a shift in product mix to our higher gross margin products.
Operating expenses for the first quarter were $85 million compared to $72.2 million last year, an increase of $12.9 million or 18%. The increase in operating expenses in the first quarter was driven by a $10.3 million, or 16% increase in selling, general and administrative expenses, and a $2.6 million, or 30% increase in research and development costs compared to the prior year period. First quarter GAAP operating expenses included certain non-operating items totaling $1.9 million, consisting of employee severance and benefits as well as other exit costs associated with certain restructuring activities. This compares to $0.3 million of restructuring-related charges in the prior year. On February 3, 2023, we committed to a plan to restructure our workforce to improve productivity and enhance profitability.
Reduction in force we reduced our count by 71 employees, or approximately 7% of all employees. The company incurred a total charge of $1.8 million in the first quarter in connection with the restructuring, primarily consisting of severance payments. Excluding restructuring items and non-cash intangible amortization of $1.2 million in both periods, non-GAAP operating expenses for the first quarter increased $11 million or 16% year-over-year, driven by higher clinical study-related spending in support of our ReNu studies and a 14% growth in SG&A expenses with roughly half of that increase related to the timing of our national sales meeting. Note that we have a detailed reconciliation of these non-operating and non-cash items in today’s earnings press release.
Our non-GAAP operating expense growth expectations for 2023 reflects mid-single-digit growth year-over-year consistent with our strategy to prioritize investments in cash areas that enhance our foundation for future growth. Operating loss for the first quarter was $4 million compared to an operating loss of $0.1 million last year, an increase in loss of $3.9 million. Total other expense for the first quarter was $0.6 million, compared to $0.7 million last year, a decrease of $0.1 million, or 12%. Net loss for the first quarter was $3 million compared to $0.9 million last year, an increase in loss of $2.1 million. Adjusted EBITDA for the first quarter was $3.8 million or 3.5% of net revenue compared to $5 million or 5.2% of net revenue last year.
We provided a full reconciliation of our adjusted EBITDA results in our earnings press release. Turning to our balance sheet. As of March 31, 2023, the company had $89.4 million in cash, cash equivalents and restricted cash and $69.9 million in debt obligations. This compared to $103.3 million in cash, cash equivalents and restricted cash and $70.8 million in debt obligations as of December 31, 2022. We also have up to $125 million of available borrowings on our revolving credit facility, as of March 31, 2023. Turning to a review of our 2023 financial guidance, which we updated in our press release this afternoon. For the 12 months ending December 31, 2023, the company now expects net revenue of between $454 million and $466 million, representing a year-over-year increase in the range of 1% to 3% as compared to net revenue of $450.9 million for the year ended December 31, 2023, this compares to our prior guidance of $450 million to $460 million.
The 2023 net revenue guidance range assumes net revenue from Advanced Wound Care products between $424 million and $432 million, representing a year-over-year change in the range of flat to up 2%. This compares to our prior guidance of $420 million to $428 million. Net revenue from Surgical & Sports Medicine products between $30 million and $34 million, representing an increase of 5% to 19% year-over-year. This range is unchanged versus our prior guidance assumptions. In terms of our profitability guidance for 2023, the company expects to generate GAAP net income of between $3.2 million and $10.9 million, adjusted net income between $8.4 million and $16.1 million. We also expect EBITDA of between $28 million and $38.7 million and adjusted EBITDA of $38.1 million and $48.8 million.
In addition to our formal guidance for 2023, we are providing some deceleration for modeling purposes for the fiscal year 2023. We now expect sales of our PuraPly products will decrease in the range of 11% to 20% year-over-year compared to our prior guidance range, which assumes a decrease of 18% to 26% year-over-year. Sales of our non-PuraPly products will increase at the midpoint of the range of approximately 22% year-over-year compared to our prior guidance, which assumed growth of approximately 28% year-over-year. Gross margins of approximately 75.5% to 76.5%, total GAAP operating expenses will increase approximately 2% to 3% year-over-year, and total non-GAAP operating expenses will increase approximately 4% to 5% year-over-year. Our 2023 non-GAAP operating expenses exclude non-cash, intangible amortization of approximately $2.9 million and estimated restructuring charges of $2.2 million.
Total interest and other expenses were approximately $3.3 million compared to our prior guidance of $5.2 million. We now expect our full year GAAP tax rate in the range of 42.5% to 61% at the high end and low end of our guidance range, respectively. This compares to our prior guidance, which assumed a full year GAAP tax rate of 29%. We continue to expect non-GAAP tax rate on adjustments of 27%. We now expect non-cash depreciation of approximately $11.5 million compared to prior guidance of $6.4 million, and our estimates for non-cash stock comp expense and weighted average diluted shares are unchanged at approximately 7.9 million approximately 130 million shares. We also expect full year 2023 CapEx to be approximately $25 million to $39 million.
And finally, we expect the second quarter revenue in the range of approximately $113 million or $117 million, representing a decline of approximately 4% to 7% year-over-year. With that, I’ll turn the call back over to Gary for some closing remarks.
Gary Gillheeney: Thank you, Dave. Our updated guidance reflects our expectations for measured growth in sales of Advanced Wound Care products in 2023, driven primarily by the impact of key products in the physician office setting is working through the national launches with recently published ASP. We also expect to navigate through continuing challenges in the office in 2023 due to customer uncertainty surrounding CMS’ potential change for Medicare payments under the physician fee schedule for Advanced Wound Care treatment. We applaud CMS are pushing forward with their initiatives to publish ASPs for skin substitutes this year. We now have the opportunity to introduce our differentiated clinically proven solution to more patients nationwide, and this represents a significant long-term growth opportunity for Organogenesis.
Importantly, executing on our strategy this year is expected to result in growing our share of patients treated with advanced modalities again in 2023. The emphasis on more patients being treated with advanced modalities is consistent with CMS’ efforts to reduce the burden on the healthcare system. Rising costs may be attributable to untreated and properly treated wounds that resist healing and result in more serious complications such as amputations. By treating wounds with advanced modalities, we believe these complications can be avoided. Proper treatment with advanced cell and tissue products that demonstrate clinical efficacy have the added benefit of improving patients’ lives while reducing the overall cost to the healthcare system and greater awareness of these advanced technologies among healthcare providers and patients should be a priority and can contribute to CMS’ efforts to reduce costs.
We also expect to strengthen our competitive position in the Surgical & Sports Medicine market in 2023. We are in year two of our strategic repositioning of the business following the expiration of the FDA’s enforcement grace period in May of 2021. We continue to identify opportunities to expand our commercial focus beyond spine fusion and foot ankle with emphasis on increasing awareness of our product solutions for surgical wounds and soft fishing procedures. We continue to optimize our independent agency relationships and look for further progress in our ongoing pilot programs, which are testing potential commercial strategies, including using small direct teams of specialists in certain procedure areas. We also look forward to strong market adoption of our PuraPly MZ product as it enters full commercialization this year.
As Dave mentioned earlier, we are focused on prudent investment in our highest priority operating expense areas, which we expect will help drive strong adjusted EBITDA generation from 2023. We’re confident that we have the right strategy to continue to build on our leadership position in the office setting as well as in wound care centers across the United States and to strengthen our competitive position in the Surgical & Sports Medicine market in 2023. Importantly, we continue to believe that the long-term growth opportunity for Organogenesis is very compelling, and we remain confident in our long-term target of sustainable, low-double-digit growth on a normalized basis. We will continue to be a leader in Advanced Wound Care while improving our competitive position in Surgical & Sports Medicine markets by launching highly innovative, highly efficacious products as we deliver on our mission to provide integrated healing solutions at substantially improved outcomes and lower the overall cost of care.
Thank you. Operator?
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Q&A Session
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Operator: Thank you, sir. [Operator Instructions] And our first question will come from the line of Ryan Zimmerman with BTIG. Your line is open. Please go ahead.
Operator: Thank you. We are currently showing no remaining questions in the queue. That does conclude today’s conference. Thank you for participating.
