Organogenesis Holdings Inc (ORGO) Q3 2020 Earnings Call Transcript

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Organogenesis Holdings Inc (NASDAQ:ORGO)
Q3 2020 Earnings Call
Nov 09, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. Good afternoon, ladies and gentlemen, and welcome to the third-quarter 2020 earnings conference call for 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 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. In 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 hand the call over to Mr.

Gary S. Gillheeney, Sr., Organogenesis Holdings’ president and chief executive officer. Please go ahead, sir.

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Thank you, and welcome, everyone, to Organogenesis Holdings’ third-quarter 2020 earnings conference call. I’m joined today on the call by Henry Hagopian, our interim chief financial officer. Now, let me start with a brief agenda of what we’ll cover in our prepared remarks today. I’ll start with an overview of our revenue performance in the third quarter, including the improving business trends we experienced during the quarter in the areas of our business that performed extremely well despite the challenging operating environment.

After my opening remarks, Henry will provide you with a more in-depth review of our quarterly financial results and the formal financial guidance we included in this afternoon’s press release, as well as a summary of our balance sheet and financial condition. And then, we’ll open it up for questions. Let me begin with a review of our third-quarter revenue performance. We reported total revenue growth of 57% year over year in the third quarter, driven by 66% growth in our advanced wound care products and 9% growth in our surgical and sports medicine products compared to the prior year.

Our revenue results were well above expectations and exceeded the high end of our preliminary revenue range announced on October 14th. Our growth in Q3 reflects a continuation of the key drivers of our growth strategy and competitive advantages that we’ve been talking about on each of our earnings calls this year. The investments we’ve made to expand our sales force in recent years, the benefits of our comprehensive and differentiated portfolio of products that address patients’ needs to treat wounds across all the stages of healing, and strong execution of our commercial strategy focused on leveraging multiple channels, new product introductions and brand loyalty. We were pleased to see the overall environment improved during the third quarter, and we reported 66% increase in total advanced wound care sales year over year, driven by our strong performance in the office channel.

And we’ve talked about our strategic focus in the office channel on prior calls and the growth we reported in sales in our advanced wound care products this quarter are a direct result of the continued strong execution of our commercial strategy in the office, which started over 18 months ago. This third-quarter advanced wound care sales growth was driven by strong demand, not only from our existing customers, but also strong contributions from adding new customers in the office channel during the period. And while our broad portfolio of products and solutions remain a key differentiator for us, the demand for our amniotic products from our advanced wound care customers has been notable throughout 2020. Our fresh amniotic membrane product, Affinity, was the largest contributor to growth again in Q3, driven by the differentiated features of the product that our clinical customers’ value, and positive reimbursement in the office channel.

We were also very encouraged by the performance of our PuraPly franchise, where sales increased 29% year over year in the third quarter. Clinicians continue to value the product’s clinical value, and we continue to see growth in the number of accounts that are utilizing PuraPly, aided in part by the introduction of the new sizes and the introduction of our XT line extension, which is selling extremely well. I also wanted to discuss an important strategic acquisition that we completed during the third quarter, and we announced in our preliminary third-quarter results press release on October 14th. The transaction with CPN Bioscience is an important one as it enhances our office strategy.

Specifically, CPN’s physician office management solution and complementary first-in-line advanced wound care products further broadens our physician offering and accelerates our growth opportunity in this exciting channel. While we are excited about the opportunity this acquisition presents, we expect this to be a longer-term growth opportunity for Organogenesis, and will not contribute materially to our revenue in 2020. In summary, we are proud of our third-quarter performance. The fundamentals of our business and strategy remains strong.

And we are well positioned to deliver strong operating and financial performance over the balance of 2020. Accordingly, we reaffirmed our financial guidance, reflecting our expectation of total revenue growth of 19 to 20% year over year in 2020. We also expect to generate positive net income and positive adjusted EBITDA for the full-year 2020, which represents the achievement of an important profitability milestone well in advance of the stated interim period financial targets we have discussed with the financial community over the last several years. Simply stated, we believe our operating and financial performance is a direct result of the strong execution of our growth and profitability strategy, and the dedication of our employees to our customers and the patients they serve.

Now, while we remain cautiously optimistic as it relates to the COVID-19 recovery in certain markets in the United States, the impressive growth and financial performance we have reported in the first nine months are a result of our thoughtful strategy, strong execution of our team and the differentiated portfolio of products that we have. And with continued execution, we expect these drivers of performance to continue, which is why we are confident in the expectation for improving growth and profitability implied by our guidance. We look forward to continued success as we deliver on our mission to provide integrated healing solutions that substantially improve medical outcomes, while lowering the overall cost of care. And with that, I’ll turn it over to Henry, our interim chief financial officer, to discuss the financial results for the quarter.

Henry?

Henry HagopianInterim Chief Financial Officer

Thank you, Gary. I will 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 of 2020 was 100.8 million compared to 64.3 million for the third quarter of 2019, an increase of 36.5 million or 57%.

Third-quarter revenue results came in above the high end of the preliminary revenue range provided on October 14th. Revenue from advanced wound care products for the third quarter of 2020 was 90 million, compared to revenue of 54.3 million for the third quarter of 2019, an increase of 35.7 million or 66%. Revenue from advanced wound care products represented 89% of total revenue in the third quarter of 2020 compared to 85% of total revenue in the prior-year period. Revenue from surgical and sports medicine products for the third quarter of 2020 was 10.8 million, compared to 10 million for the third quarter of 2019, an increase of 0.9 million or 9%.

Revenue from surgical and sports medicine products represented 11% of total revenue in the third quarter of 2020, compared to 15% of total revenue on the prior-year period. Revenue from PuraPly products for the third quarter of 2020 was 40.9 million, compared to 31.8 million in the third quarter of 2019, an increase of 9.2 million or 29%. Revenue from PuraPly products represented approximately 41% of total revenue in the third quarter of 2020 compared to 49% of total revenue in the third quarter of 2019. As of September 30, 2020, we had approximately 295 direct sales representatives compared to 265 at year-end 2019, and approximately 170 independent agencies compared to 160 at year-end 2019.

Gross profit for the third quarter of 2020 was 77.8 million compared to 45.1 million for the third quarter of 2019, an increase of 32.7 million or 72%. Gross profit margin for the third quarter of 2020 was 77% of revenue compared to 70% for the third quarter of 2019. The increase in gross profit resulted primarily from increased sales volume due to the strength in our advanced wound care and surgical and sports medicine products as well as a shift in product mix to our higher gross margin products. Operating expenses for the third quarter of 2020 were 54.9 million, compared to 53.4 million for the third quarter of 2019, an increase of 1.5 million or 3%.

The increase in operating expenses in the third quarter of 2020 as compared to the third quarter of 2019 was driven primarily by higher selling, general and administrative expenses, which increased to 51.1 million compared to 49.5 million in the third quarter of 2019, an increase of 1.7 million or 3%. The increase in selling, general and administrative expenses is primarily due to a 6.4 million increase related to additional headcount, primarily in our direct sales force and increased sales commissions due to increased sales, a 0.6 million increase in other selling costs, including credit card processing fees and royalties. These increases were partially offset by a 3.3 million decrease related to reduced travel and marketing programs amid travel restrictions in place due to COVID-19, a 0.6 million decrease in amortization associated with intangible assets amortized using an accelerated method, and a 0.6 million decrease in legal, consulting fees and other costs associated with the ongoing operations of our business and a 0.8 million decrease in bad debt, primarily due to the collection of previously reserved related party receivables. R&D expense was 3.7 million for the third quarter of 2020 compared to 3.9 million in the third quarter of 2019, a decrease of 0.2 million or 5%.

The decrease was primarily due to delayed enrollment in trials and limited clinical spending due to the COVID-19 pandemic. Operating income for the third quarter of 2020 was 23 million, compared to an operating loss of 8.3 million for the third quarter of 2019, an increase of 31.2 million. Total other expenses for the third quarter of 2020 were 2 million compared to 2.4 million for the third quarter of 2019, a decrease of 0.5 million or 19%. The decrease is primarily due to a 1 million decrease in legal accruals related to the settlement of an assumed legacy lawsuit from the sellers of NuTech Medical in October 2020.

We assume the legacy lawsuit as part of the resolution of the deferred acquisition consideration dispute with the sellers of NuTech Medical in February 2020. The decrease in total other expenses net was partially offset by a half million or 22% increase in interest expense, resulting from the increased borrowings under the 2019 credit agreement. Net income for the third quarter of 2020 was 20.9 million or $0.19 per share, compared to a net loss of 10.7 million or $0.12 per share for the third quarter of 2019, an increase of 31.7 million. Adjusted EBITDA of 24.6 million for the third quarter of 2020 compared to adjusted EBITDA loss of 4.8 million for the third quarter of 2019, an increase of 29.4 million.

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 SEC this afternoon. As disclosed in our preliminary third quarter of 2020 press release on October 14, 2020, we acquired certain assets and assumed certain liabilities of CPN Biosciences on September 17, 2020. The aggregated consideration amounted to 19 million as of the acquisition date, which consisted of 6.4 million in cash, 2,151,438 shares of our common stock with a fair value of 8.8 million, and a contingent consideration with a fair value of 3.8 million. At the closing, we paid 5.8 million in cash and issued 1,947,953 shares of our Class A common stock.

The remaining consideration was held back and will be paid or issued, as applicable, 18 months after the closing date, subject to any offsetting indemnification claims against CPN. The results of operations of CPN have been included in our consolidated financial statements beginning on the acquisition date. Revenue and expenses of CPM since the acquisition date were not material. Turning to a brief review of our financial results for the nine months ending September 30th, 2020.

Net revenue for the nine months ended September 30th, 2020, was 231.5 million, compared to 186.3 million for the first nine months of 2019, an increase of 45.2 million or 24%. The increase in net revenue was driven by an increase of 43.6 million or 28% in net revenue of advanced wound care products, and an increase of 1.5 million or 5% in net revenue of surgical and sports medicine products compared to the prior year. Net revenue of PuraPly products for the nine months ended September 30th, 2020, were 100.2 million compared to 86.9 million for the first nine months of 2019, an increase of 15.1 million or 17%. Net revenue of PuraPly products represented approximately 44% of net revenue for the nine months ended September 30th, 2020, compared to 47% for the first nine months of 2019.

Gross profit for the nine months ended September 30th, 2020, was 169.7 million or 73% of net revenue, compared to 130.8 million or 70% of net revenue for the first nine months of 2019, an increase of 38.9 million or 30%. The operating income for the nine months ended September 30th, 2020, was 5.6 million compared to an operating loss of 27.7 million for the first nine months of 2019, an increase of 33.3 million. Net loss for the nine months ended September 30th, 2020 was 0.5 million or $0.01 per share, compared to net loss of 36.1 million or $0.40 per share for the first nine months of 2019. Now, turning to the balance sheet.

As of September 30, 2020, the company had 36.5 million in cash and 114.7 million in debt obligations, of which, 15.7 million were capital lease obligations compared to 60.2 million in cash and 100.6 million in debt obligations, of which 17.5 million were capital lease obligations as of December 31st, 2019. The net change in cash of approximately 23.5 million for the nine months ended September 30th, 2020, was driven by 19.5 million of cash used in operating activities, 16.4 million of cash used in investing activities, offset partially by 12.3 million of cash provided by financing activities during the period. The principal drivers of the cash flows used in operating activities was a 19 million increase in accounts receivable, which is directly related to the substantial increase in sales as well as a build in inventory to support future sales, offset by non-cash expenses such as depreciation and amortization. The increase in cash used in investing activities is principally due to the acquisition of CPN and continued investment in our infrastructure to support our growth.

As of September 30th, 2020, we are in compliance with the financial covenants under the credit agreement with SVB. At quarter-end, we have 59.7 million of outstanding borrowings under the term loan facility and 39.4 million of borrowings on the revolver. We expect that our cash on hand as of September 30th, 2020, and cash flows from product sales, will be sufficient to fund our operating expenses, capital expenditure requirements, and debt service payments for at least the 12 months following our 10-Q filing date. Turning to a review of our 2020 revenue guidance.

As detailed in our press release this afternoon, we are reaffirming our fiscal year 2020 revenue guidance originally issued on October 14th, 2020. For the 12 months ending December 31st, 2020, the company now expects net revenue of between 311 million and 314 million, representing growth of approximately 19 to 20% year over year as compared to net revenue of 261 million for the 12 months ended December 31st, 2019. The 2020 net revenue guidance range assumes net revenue from advanced wound care products of between 273 million and 275 million, representing growth of approximately 24 to 25% year over year, as compared to net revenue of 221 million for the 12 months ended December 31st, 2019. Net revenue from surgical and sports medicine products of between 38 million and 39 million, representing a decrease of approximately 3 to 6% year over year as compared to net revenue of 40 million for the 12 months ended December 31st, 2019.

Net revenue from the sale of PuraPly products of between 119 million and 121 million, representing a decrease of approximately 5 to 6% year over year, as compared to net revenue of 127 million for the 12 months ended December 31st, 2019. We also expect to report positive GAAP net income and positive adjusted EBITDA for the fourth quarter and full fiscal year 2020 period. In addition to the formal revenue guidance, we would also like to provide a few additional considerations when evaluating our growth expectations for fiscal year 2020. This additional color is intended to help the investment community better understand the assumptions supporting our revenue expectations for 2020.

First, the largest contributor to our total company net revenue growth in fiscal year 2020 will be sales of our amniotic products, which at the midpoint of our full-year range assumes amniotic growth of approximately 107% year over year in 2020. This compares to the assumptions supporting our prior guidance range, approximately 60% growth year over year, which we discussed on our Q2 earnings call. Second, we expect sales of our remaining non-PuraPly, non-amniotic products, which collectively formed the group called PMA and other, to decrease at the midpoint of the range, approximately 8% year over year in 2020. This expectation is unchanged from the assumptions supporting our prior guidance range, which we discussed on our Q2 earnings call.

Third, from the midpoint of our fiscal year 2020 net revenue guidance assumes PuraPly sales declined approximately 5% year over year. Compared to our prior guidance, which called for PuraPly sales to decrease approximately 14% year over year. The change in our PuraPly guidance was driven by the stronger-than-expected sales performance in Q3, offset partially by a slight decrease in sales expectations for the fourth quarter. Specifically, guidance implies PuraPly sales will decrease by approximately 55% year over year in the fourth quarter of 2020, following the transition to the high-cost bundle beginning October 1, 2020, compared to prior expectations, which called for PuraPly sales to decrease approximately 45 to 50% year-over-year.

That said, early PuraPly trends in the quarter are encouraging. With that, operator, I’ll turn the call back to you.

Questions & Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from Matt Miksic with Credit Suisse. You may proceed with your question.

Unknown speaker

Hey, good afternoon. This is Vick calling in for Matt. Thanks so much for taking the question. I just want to — I had two questions.

The first one, with the rising COVID cases throughout the U.S., I guess, have you seen any sort of impact on your physician office channel strategy in the last couple of weeks, I guess? And then I had a follow-up. Thanks.

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Sure. This is Gary. Hi, Vick. We haven’t seen a decline at all in census in the office setting.

There has been — at the end of Q3, we did see a slight decline in access to the outpatient wound care center. Though we maintain virtual contact with all our customers, we haven’t seen an impact on sales in the outpatient setting either at this point. But we have seen a trend of some outpatient centers starting to limit access.

Unknown speaker

Great. Very helpful. And just one follow-up, if I could. You spoke about PuraPly trends in the quarter.

I was just wondering if you could kind of help us learn what you’ve seen in the past couple of weeks with the pass-through having expired and how that exploration of pass-through is impacting your larger product sizes thus far. Thanks so much.

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Sure. It’s still a little early to tell. But what we did see is we didn’t see the decline in PuraPly revenue in Q3 that we had seen in the past, where just six to seven weeks prior to the expiration of pass-through, we would see a decline. We did not see that decline.

So that was important and encouraging. We did introduce some new sizes of Puraply, and we’ve also accelerated our office growth strategy with PuraPly. So both of those are doing well. The office strategy sales of PuraPly are doing well.

Our XT line extension in the office is doing extremely well. And the new sizes that we’re introducing under the bundle to absorb some of those larger wounds are also doing well. So those are the positive trends that Henry had alluded to.

Unknown speaker

Thank you.

Gary S. Gillheeney, Sr.President and Chief Executive Officer

You’re welcome.

Operator

Thank you. Our next question comes from Ryan Zimmerman with BTIG. You may proceed with your question.

Ryan ZimmermanBTIG — Analyst

Yes. Good evening, Gary and Henry. Thanks for taking the questions and congrats on the strong quarter. Maybe, Gary, just to start.

On the CPN Biosciences acquisition, can you talk about the longer-term rationale for that acquisition? And is it around the physician management component aspect of that business? Or is it on their products that you can offer, maybe expanding in some areas that we previously weren’t in? I’d love to just get your thoughts there. And then I have a follow-up. Thank you.

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Sure. It’s really more the access of additional accounts for us and the ability to reach even beyond the office all the way to the home eventually where we see a lot of the wounds moving. So it’s more of an access opportunity for us. So that access generates additional product sales, and they also have some first-in-line advanced wound care products that we don’t have.

So that also gives us an earlier introduction to patients, which will enhance our ability to sell our other products. So we expect that our products as well as their products will be pushed through that channel. And it does offer us the ability to stay connected to those customers on a daily basis. So there’s also greater share of voice for Organogenesis within that channel, and it’s a more efficient way to communicate in the cell in the office channel.

Ryan ZimmermanBTIG — Analyst

OK. That’s very helpful. And then maybe, Henry, for you. Amniotics drove really strong margin performance this quarter, it seems like.

And based on your guidance for the fourth quarter, it would suggest that that should continue. If you can just kind of help us with the puts and takes there. As we think about the margins longer term, maybe as PuraPly lapped and the pass-through dynamics are lapped, how can we think about margins, especially as amniotics are just driving such improved margin performance? Thank you.

Henry HagopianInterim Chief Financial Officer

We don’t guide on our margin by product, but we feel very confident that the trends we have experienced here in Q3 will continue.

Ryan ZimmermanBTIG — Analyst

Understood. Thank you.

Gary S. Gillheeney, Sr.President and Chief Executive Officer

So maybe a little more color, Ryan. So clearly, PuraPly coming off of pass-through has some ASP implications for the bundle. But in the office, we have a little better margin there. But our other products, to your point, our amniotic technology and our line extensions at PuraPly will help offset that margin decline that you would naturally get for those larger pieces in the bundled setting.

Ryan ZimmermanBTIG — Analyst

OK. That’s helpful color. Thank you. Thank you, Gary.

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Sure.

Operator

Thank you. [Operator Instructions] Our next question comes from Steven Lichtman with Oppenheimer & Co. You may proceed with your question.

Steven LichtmanOppenheimer & Co. Inc. — Analyst

Thank you. Hi, guys. Gary, just wanted to touch base on Affinity. Just given the extraordinary growth you’re seeing in advanced wound care and amniotics particular, any color you can provide on how much of what we’re seeing in the near-term sort of pent-up demand prior to being able to sort of relaunch in the first half of this year versus some of the expansion that you talked about with new customers.

And what is that runway like that you see expansion into new customers in the office channel?

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Sure. So there was some pent-up demand for the product in Q2 because we did have some existing customers back in 2018, but the growth — the majority of the growth is from our existing customers that had not used Affinity and the expansion of the customer base. So one of the advantages of our amniotic technology is we’re really expanding the market, and we’re doing that with our amnion. But what we’ve also experienced in the office is all brands are growing in the office, not just Affinity.

So that gives us confidence that we are expanding the market. We’re doing that by adding customers and folks who haven’t perhaps used some of the advanced modalities that we have now.

Steven LichtmanOppenheimer & Co. Inc. — Analyst

Got it. Thank you. And then just a follow-up on amniotics. With Novacor, can you talk a little bit about the timing of that launch? And how you think that that will further add to the momentum in the — in your amnion business?

Gary S. Gillheeney, Sr.President and Chief Executive Officer

So our expectation is Novacor would be launched sometime in Q4 of next year. So one of the challenges we have with launching Novacor is it’s the same manufacturer that manufactures Affinity. And as I’ve said on a number of calls, we’re continuing to ramp up our affinity manufacturing each quarter. It’s one of the execution challenges we have ahead of us.

But it also takes up some of the capacity for Nova course. So it really depends on how long affinity continues to grow at the pace that it’s growing. But right now, we’re projecting Q4 of ’21 for the launch, and we do expect it to be a significant growth driver for the company in the future.

Steven LichtmanOppenheimer & Co. Inc. — Analyst

Great. Thanks, Gary.

Operator

[Operator signoff]

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Thank you very much.

Duration: 35 minutes

Call participants:

Gary S. Gillheeney, Sr.President and Chief Executive Officer

Henry HagopianInterim Chief Financial Officer

Unknown speaker

Ryan ZimmermanBTIG — Analyst

Steven LichtmanOppenheimer & Co. Inc. — Analyst

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