Organogenesis Holdings Inc. (NASDAQ:ORGO) Q3 2024 Earnings Call Transcript

Organogenesis Holdings Inc. (NASDAQ:ORGO) Q3 2024 Earnings Call Transcript November 12, 2024

Operator: Please stand by. Welcome ladies and gentlemen to the Third Quarter of Fiscal Year 2024 Earnings Conference Call for Organogenesis Holdings Inc. At this time, all participants are placed in listen-only mode. Please note, that this conference call is being recorded and 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 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 a sequential filing with 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 a result of new information, future events or otherwise, except as required by applicable security laws. This call will also include references to certain financial measures that are not calculated in accordance with general accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliation of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Gary S. Gillheeney Sr., Organogenesis Holdings President, Chief Executive Officer and Chair of the Board. Please go ahead, Sir.

Gary Gillheeney: Thank you, operator and welcome, everyone to Organogenesis Holdings Third Quarter Fiscal Year 2024 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’ll cover during our prepared remarks. I will review an overview of our third quarter revenue results in an update on our key operating and strategic developments in recent months. Dave will then provide you with an in-depth review of our third quarter financial results, our balance sheet and financial condition at quarter end, as well as our financial guidance for 2024, which we updated in our press release this afternoon. I’ll then share some closing thoughts before we open the call up for questions beginning.

With a review of our revenue results for Q3, we delivered sales results above the high end of the guidance range outlined on our second quarter call. Our team’s strong execution resulted in better-than-expected productivity despite continued disruption in the marketplace. Our third quarter results reflect improving momentum in the underlying business trends and we were pleased to see customer demand in excess of what our guidance had assumed during the third quarter. We believe the better-than-expected revenue results we have delivered in each of the first 3/4 of 2024 represent the clearest evidence that we have focused our commercial team on the right strategy to navigate through this challenging operating environment. Turning to a review of our progress towards key strategic initiatives in the third quarter, on August 8 we announced the additional clinical results from our first Phase 3 clinical trial, a prospective double blinded multicenter saline control parallel group clinical trial of 515 patients.

The results met the expectations for the study by meeting the primary endpoint of a statistically significant reduction in knee pain and the first secondary endpoint of statistically significant maintenance of function at six months. We’ve also made important progress on our second Phase three multicentered randomized clinical trial evaluating the safety and efficacy of renew. During the third quarter we completed enrollment of 594 patients well ahead of our original timing expectations and notably we enrolled 120 more patients than the 474 required by the study. As announced in a separate press release, we received a favorable outcome of the pre specified interim analysis for the first 50% of the required patients in our second phase 3 trial.

The independent Data Monitoring Committee, or DMC for the trial provided directional guidance on the results of the interim analysis while rigorously maintaining all aspects of study blinding. The DMC recommended that the trial proceed without modification and without increase to sample size. Additionally, the DMC found the safety data to be consistent with the known safety profile for renew. We continue to believe that if approved, introducing RENEW to the large and growing pain management market represents a transformational opportunity for organogenesis. We believe renew, if approved, will potentially address an unmet clinical need for all patients suffering from symptomatic knee OA, a degenerative joint disease that affects more than 30 million Americans.

We have a clear roadmap and timeline for our RENEW BLA submission and we are on track to deliver the RENEW BLA submission by the end of Q4 2025. If successful, renew would be the only FDA approved biologic intra articular injection to improve pain symptoms related to symptomatic knee oa. Before turning the call over to Dave, I wanted to share a brief update on our recent progress in the areas of clinical validation and Medicare reimbursement and coverage. On October 1, we announced the publication of results from a robust 218 patient study of NEUSHEAL in the Journal of Wound Care Neushield demonstrated statistically superior frequency of wound closure compared to the standard of care at five intervals from four weeks to 12 weeks. A total of 218 patients with challenging DFUs were randomized into two treatment groups, NeuShield plus standard of care or standard of care alone.

The Neushield group demonstrated a 48% greater probability of wound closure and decreased medium time to complete wound closure when compared to standard of care. We are pleased this data demonstrates Neushield provides a significant advantage when managing DFUs, a severe medical crisis that often leads to amputation and associated higher mortality rates, especially in underserved populations as outlined on our latest earnings call. Our comment letter to the Macs included this high-quality published data and evidence evaluating Neusheal for the treatment of DFU that was not considered in the draft lcd which we believe demonstrates that Neusheal meets all the criteria for coverage. As a leader in this field, we support CMS evidence-based approach to coverage for these serious wounds and believe this large peer reviewed publication satisfies the requirements for medical coverage under the proposed lcd.

Our comment letter also included existing clinical and real-world data supporting our case that pureply AM and XT meet the requirements for Medicare coverage as well. This data includes a high quality published data from 728 patients supporting coverage for PurePly AM and XT for the treatment of DFU and VLUs and a comparative effectiveness study of 294 patients published in May of 2024. After the literature review for the draft LCD was completed which shows non inferiority to Theraskin, a product the draft LCD proposed to cover, we also made progress in expanding our clinical validation for pure PLY in the third quarter. In August we enrolled the first patient in our new RCT, the PREPARE study evaluating the Pureply AM+ standard of care versus standard of care alone in 170 patients with chronic DFUs. On November 1, CMS issued the final rules for the Medicare physician fee schedule and the hospital outpatient department.

CMS has not proposed any changes to the payment policies for skin substitutes in either setting and the final rule maintains the status quo in the physician fee schedule. Final Rule There were no changes in payment policy for skin substitutes for 2025. CMS reiterated that its goal is to achieve a consistent payment approach for skin substitute products that does not negatively impact beneficiary access. CMS also noted that it intends to bridge the gap and variations of pricing for these products through the establishment of consistent framework for payment of skin substitutes under the physician fee schedule in future rulemaking CMS does not say more about what that framework might look like or the timing of any future changes. Now we have communicated to CMS that they should transition to a value based payment methodology where skin substitute categories are paid on a fixed per square centimeter basis.

This value-based payment methodology has the potential to substantially reduce Medicare Part B expenditures, improve patient access, and enable physicians to prescribe treatments that are based on the individual needs of the patients and provide the best outcome for patients and the healthcare system. While there was no change in payment policy for skin substitutes in the final rule for 2025, we were pleased to see the final rule, including commentary from cms, recognizing the benefit of continued dialogue with interested parties on payment for skin substitute products to help inform policy changes for future rulemaking. As a leader in the market, we have been and will continue to actively engage with CMS to advocate for the requisite changes to the payment Systems.

We appreciate CMS’s willingness to consider our framework and our feedback, and we are particularly pleased in the acknowledgement of the need to establish a framework for consistent payment for skin substitute products under the physician fee schedule that does not negatively impact beneficiary access. We applaud the MAX for continuing to prioritize coverage with demonstrated clinical efficacy for skin substitute products. We have been pushing for reform for many years and believe that this proposed LCD represents a substantial step forward towards cleaning up the marketplace. Importantly, given our leadership position in the space, we remain vocal and active in support of the immediate need for reform. In addition to our direct efforts with CMS and the max, we are engaging with stakeholders including physicians, patient advocacy groups, and clinical and industry associations, and we are leading primary health policy education initiatives directed to 59 congressional offices.

We want to ensure all parties are as well informed as possible and that they are carefully considering the impacts of potential changes to the coverage of skin substitutes for the treatment of DFUs and VLUs, including the potential treatment disparity in health inequity, impact on populations with higher rates of diabetes and comorbidity. We continue to believe these material changes from the MAX and CMS in the coverage and payment of skin substitutes, if ultimately adopted, will be positive for the long-term health of the wound care market and its patients. While there’ll be a preliminary period of transition and disruption if these sweeping changes are implemented, we believe organogenesis is strong brand equity, established commercial infrastructure, and our plan to establish additional clinical validation to secure coverage of key commercialized products taken together represent a substantial competitive advantage for us that has us well positioned to maximize the enormous opportunity to serve more patients with our highly innovative and highly efficacious product.

With that, let me turn the call over to Dave.

Dave Francisco: Thanks, Gary. I’ll begin with a review of our third 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 third quarter was $115.2 million, up 6%. As Gary mentioned, these results were ahead of expectations we provided on our Q2 call, which called for total second quarter revenue in a range of $105 million to $113 million, reflecting continued strong momentum in the business during the third quarter. Our advanced wound care net revenue for the third quarter was $108 million, up 7%, and net revenue from surgical and sports medicine products for the third quarter was $7 million, up 1%. Gross profit for the third quarter was $88 million, or 76.7% of net revenue compared to 76.2% last year.

Operating expenses for the third quarter were $82.1 million compared to $74.7 million last year, an increase of $7.4 million or 10% the year-over-year change in operating expenses was driven by a $7.6 million or 12% increase in selling, general and administrative expenses compared to the prior year period. Research and development expenses declined 1% year-over-year and declined 34% sequentially, the latter of which was due to the timing of expenses associated with clinical research and trials. Operating income for the third quarter was $6.2 million compared to operating income of $8.1 million last year, a decrease of $1.8 million or 22%. Net income for the third quarter was $12.3 million compared to net income of $13.2 million last year, an increase of $9.2 million.

Adjusted net income for the third quarter was $12.9 million compared to $5.3 million last year. The largest contributor to the year-over-year increase in net income and adjusted net income was a change in income tax. We had a benefit of $6.5 million in the third quarter of 2024 compared to an expense of $4.5 million last year. The change in income tax year-over-year was driven primarily by R&D tax credit incentives, partially offset by tax adjustments related to executive compensation and other non-deductible expenses. Adjusted EBITDA for the third quarter was $13.4 million, or 12% of net revenue compared to $16 million, or 14.7% of net revenue last year. We provided a full reconciliation of our adjusted net income and adjusted EBITDA results in our earnings release Turning to the balance sheet, as of September 30, 2024, the company had $94.9 million in cash, cash equivalents and restricted cash and $62.1 million in net debt obligations compared to $104.3 million in cash, cash equivalents and Restricted cash and $66.2 million in net debt obligations as of December 31, 2023.

We also have up to $125 million of available borrowings on our revolving credit facility as of September 30, 2024. As announced in a separate press release this afternoon, we completed the closing of a private placement of Series A convertible preferred Stock to Avista Healthcare Partners with gross proceeds to the company of $100 million prior to deduction of fees and expenses. The Company intends to use these net proceeds from the closing of the private placement to fund strategic growth initiatives including but not limited to operating and commercial activities, clinical development programs, working capital, capital expenditures and for general corporate purposes. This transaction substantially enhances our balance sheet and financial condition with important capital to execute our long-term growth strategies and to provide us cash to service remaining principal owed at the maturity of our term loan facility in mid-2026.

We appreciate the support from leading healthcare investor and believe it reflects Avista’s confidence in the compelling opportunity investing in Organogenesis presents. Turning to a review of our 2024 financial guidance, we are updating revenue guidance to reflect the better-than-expected results in the third quarter. Our revenue guidance continues to reflect the potential near term disruption in the fourth quarter in the market that we expect from the LCDs. Note our guidance continues to reflect the expectation that the final ruling from the MAX will be announced in the fourth quarter with an effective date of January 1, 2025 for the 12 months ending December 31, 2024. The company now expects net revenue between $455 million and $480 million representing a year-over-year increase in the range of 5% to 11% as it compared to net revenue of $433.1 million for the year ended December 31, 2023.

The 2024 Net Revenue Guidance range assumes net revenue from advanced wound care products between $429 million and $452 million, representing a year-over-year increase in the range of 6% to 11% and net revenue from surgical and sports medicine products between $26 million and $28 million representing a year-over-year change in the range of a decline of 6% to an increase of 1%. We have updated our GAAP Profitability and EBITDA guidance as well. Specifically, we now expect net loss in the range of $12.3 million to $0.6 million compared to a range of GAAP net loss of $27 million to a GAAP net loss of $12 million. Previously. We now expect EBITDA in the range of a loss of $1.3 million to positive EBITDA of $14.4 million compared to an EBITDA range of a loss of $17 million to positive EBITDA of $2 million.

Previously, we now expect non-GAAP adjusted income in the range of $6.7 million to $18.4 million compared to a range of non-GAAP adjusted net loss of $8 million to non-GAAP adjusted net income $7 million previously and we now expect adjusted EBITDA in the range of $31.7 million to $47.4 million compared to adjusted EBITDA in the range of $16 million to $35 million previously. With that, I’ll turn the call back to Gary for some closing remarks.

Gary Gillheeney: Thanks David Our third quarter results reflect strong execution from our commercial team amidst the continuing challenging operating environment. We strongly believe the material changes proposed by the Macs in the coverage of skin substitutes, if ultimately adopted, will be positive for the long-term health of the wound care market. We have a strategy to leverage our existing strong clinical and real-world data, including RCTs and have already initiated the new RCT to secure additional clinical evidence and we expect to secure coverage for additional products on the covered list later this year and into next year. While there will be a period of transition and disruption if these sweeping changes are implemented, we believe that organogenesis is strong brand equity, established commercial infrastructure and plan to establish additional clinical validation to secure coverage of key commercialized products taken together represent a substantial competitive advantage for us that has us well positioned to maximize the enormous opportunity to serve more patients.

Further, while the final Physician Fee schedule rule for 2025 did not include the substantial changes that we believe are needed to be implemented, we believe CMS willingness to consider our feedback and we’re particularly pleased in its acknowledgment of the need to establish a framework for consistent payment for skin substitute products under the Physician Fee Schedule that does not negatively impact patient beneficiary access. We are excited by the continued progress in our RENEW program and have a clear target for submission of our BLA by the end of Q4 2025 and if approved. Introducing RENEW as an innovative pain management solution for the millions of patients suffering from NEOA represents a truly transformational opportunity for organogenesis and importantly one that is consistent with our mission to provide integrated healing solutions that substantially improve outcomes while lowering the overall cost of care.

And I would also like to acknowledge the continued hard work and dedication to our mission demonstrated by our employees throughout the organization, our strong performance and progress towards our key strategic initiatives over the first nine months of 2024 as a result of their efforts and finally, I’d like to recognize the significant investment in organogenesis that we received from Avista Healthcare Partners, a leading healthcare investor and one of the original investors when we went public in 2018. This financing provides valuable strategic growth capital and significantly enhances our balance sheet and financial flexibility. We look forward to leveraging Avista’s deep industry expertise and proactive value-added investment approach and believe this investment from a leading healthcare investor represents a strong validation of the long term opportunity for organogenesis as a leader in our space with highly innovative products that deliver on our mission.

With that, I’ll turn the call over to the operator to open the call for questions.

Q&A Session

Operator: Thank you, sir. [Operator Instructions]. One moment for our first question. And our first question will come from Ross Osborne from Cantor Fitzgerald.

Ross Osborne: Hey guys, congrats on the quarter and thanks for taking our questions. So starting off, would you walk through how your initiative on broadening your salesforce has gone during in terms of direct reps? And would you provide an update on how many of those reps are now focused on the sports med business?

Gary Gillheeney: Dave, do you want to grab that? Dave, you on mute?

Dave Francisco: Sorry, I was. Yes, we did increase our rep count in the quarter. We’re seeing some good performance from that standpoint and seeing some great productivity that we’re seeing particularly out of the wound care reps, I think on the direct side and SSM. I think we’re under 20 at this point. Okay, got it. And then looking at OpEx spin and particularly the R&D line, would you provide some more color where you were able to pull in spin during the quarter and how we should think about spend in 2025 with some of the trials going on there? Yeah, sure. So that was lower than our expectations were we expected it to tick down a little bit from Q2 and we expect it to be closer to the Q2 spend rate in the fourth quarter as we kind of pull back up.

As you know, we’re spending quite a bit on the BLA and so it does tend to be lumpy sometimes. And so it just was the timing of spend that hit in the third quarter a little bit less than we had anticipated as far as 25 is concerned. Obviously, we haven’t guided to that yet, but we’re going to continue to invest in a similar fashion as those efforts around the BLA continue.

Operator: Thank you. [Operator Instructions]. Our next question comes from the line of Ryan Zimmerman from BTIG.

Ryan Zimmerman: Hey, good afternoon. Can you hear me okay? All right. So you know, appreciate that there’s still some uncertainty in the market, Gary and Dave, around the LCDs, but you know, seasonally the fourth quarter is typically the strongest. And I guess I’m curious, the implied guidance for fourth quarter calls for a bit of a step down. So maybe what’s assumed on the low end? What’s assumed on the high end in terms of impacts to the AWC business? And what did you see this quarter? Just real quick, Dave, what did you see this quarter in terms of impact because you were able to really manage through it?

Dave Francisco: Yeah, so we had relatively limited impact in the quarter, but you know, obviously we wanted to keep a relatively wide range in the third and fourth quarter just to be ensured that we had that captured. But what we’ve seen is great momentum in the business in the first half that carried into the third quarter. Again, as you mentioned, very little, or I mentioned, very little disruption from that perspective. As far as the Q4 guide, obviously we took up the full year on both the low and the high, but then we kept the low end consistent with what we talked about in the Q2 call. So the concept there really is that our expectation continues to be that we expect the LCD to go into effect in early January. And so sometime in mid-November we would expect to see that come out because I think there’s a 45 day period between when it’s announced and when it goes live.

So the question is, do customers pull back on their spending from that perspective, given the drop of the lcd, depending on what it says. So that’s the kind of lower end. And then on the higher end, of course, it’s just business as usual. Again, we’ve seen very good progress and great business momentum in the first three quarters of the year, beating each consecutive quarter. So that’s kind of the range, if that helps.

Ryan Zimmerman: Okay, very helpful. And then Gary on Renew saw the interim analysis yesterday. Nice to see. Certainly consistent, another proof point in the potential for renew between now and fourth quarter ’25. What needs to occur in order to meet those timelines and what’s assumed in terms of you guys’ kind of wrapping up the second confirmatory trial. Sure. So, you know, we’ve achieved last patient, last visit in June. We would expect to have the interim analysis of that second trial by Q4. And assuming that we’re able to hit that deadline, then we expect that we’ll be able to make the filing of the BLA in Q4 of ’25. So fortunately, last patient, last visit has been accomplished and now it’s a matter of actually crunching the data and getting that true interim analysis in Q4 of this year. And we feel confident then we’ll be on track to submit in Q4 of ’25 the full BLA.

Operator: Thank you. [Operator Instructions]. 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.