Organogenesis Holdings Inc.

Good afternoon, ladies and gentlemen, and welcome to the fourth quarter 2020 earnings conference call for Organogenesis Holdings Inc. At this time, all participants have been placed in 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 and quarterly reports. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date today. 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 GAF. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. I would now like to turn the call over to Mr. Gary S. Gilkini, Sr., Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir.

Thank you. and welcome everyone to Organogenesis Holdings' fourth quarter 2020 earnings conference call. I'm joined on the call today by Dave Francisco, our new chief financial officer who was appointed to the role in February and joins us after a long career at Perkin Elmer. Let me start with a brief agenda of what we'll cover today in our prepared remarks. I will start out with an overview of our revenue performance in the fourth quarter in a review of the key drivers of the impressive growth that our team delivered despite the challenging operating environment. I'll then share a brief review of our operating highlights in the fourth quarter and year-to-date periods. And after my remarks, Dave will provide you with a more in-depth review of our quarterly financial results and the formal guidance for 2021 that we included in our afternoon's press release. And then we'll open up for questions. Let me begin with a brief review of our fourth quarter revenue performance. We reported total revenue growth of 43% year-over-year in the fourth quarter, driven by 48% growth in sales of our advanced wound care products and 17% growth in the sale of our surgical and sports medicine products compared to the prior year. Our revenue results were well above our guidance and exceeded the high end of our preliminary revenue range announced on January 13th. Our growth in Q4 reflected a continuation of the key drivers of our growth strategy and competitive advantages that we've talked about on each of our earnings calls over the last two years, including the investments that we've made to expand our sales force in recent years, the benefits of our comprehensive portfolio of products that address patient needs to treat wounds across all the stages of the healing process, and the strong execution of our commercial strategy focused on leveraging our products in multiple channels, new product introductions, and brand loyalty. Let me share a little more color on how each of these longer-term drivers of growth contributed to the strong performance in Q4. First, we've made significant investments to grow our team of direct sales representatives in recent years. We ended 2020 with 300 direct sales reps compared to 265 at the end of 2019, That's an increase of 13% year over year. And we've prioritized this area of investment over the last three years. And as a result, the number of direct sales representatives have increased at a CAGR of 16% since the end of 2017. Our fourth quarter and fiscal year revenue results clearly benefited from this investment that we've made to grow our direct commercial team over the last several years. Second, our strategy to broaden the reach of our products continue to bear fruit. We've been focused on expanding into new physician specialties, multiple sites of care, and leveraging our research and development pipeline to increase the number of new product introductions. And there's no better example of our team's success in executing this strategy than the impressive PureApply performance that the team delivered in Q4. PureApply sales increased 13% year-over-year in the fourth quarter, well ahead of the implied growth rate assumed in our 2020 revenue guidance report. which calls for sales to decline approximately 50% year-over-year as a result of the anticipated pricing headwinds related to the change in reimbursement status for the sale of PureApply products. This change impacted only PureApply sold in the outpatient setting, which transitioned the product into the high-cost bundle on October 1, 2020. We are proud of the results in Q4 as we believe it reflects the strong execution of the strategy to navigate the loss of pass-through status that we've been discussing with the investment community over the last two years. We've positioned the product differently this time coming off of pass-through with additional clinical data, additional sites of care, additional physician specialty, and we launched five new pure applied product and line extensions in 2020. These all contributed to our ability to drive strong sales performance in the fourth quarter. An important part of the Pure Apply strategy over the last two years was to grow the Pure Apply brand. And the improvement in the overall awareness of Pure Apply and what it can do can't be overstated. Pure Apply is better positioned in the marketplace today than at any point in years past. Clinicians continue to value this product's differentiation, and we continue to see a growth in a number of accounts utilizing PureApply, aided in part by the strong sales of the five new product and line extensions introduced in 2020, four of which were launched just in Q4. Sales of our amniotic products were the third area of notable strength in Q4. The sales of amniotic products were the largest contributor to the company's growth again in Q4. Our growth strategy in the office is our fourth area of notable strength. It's a continuation of what we've discussed on calls throughout 2020. We've been working for several years to penetrate the office market, primarily with channel-specific product offerings and more recently leveraging the acquisition of our CPN bioscience. We acquired CPN this past September primarily for the access that CPN's physician office management solution provides, which further broadens our physician offering and accelerates our growth opportunity in the office channel. Finally, our fourth quarter sales results benefited from better than expected sales of our surgical and sports medicine products, which increased 17% year over year in Q4, well ahead of our guidance expectations. Surgical and sports medicine sales growth was fueled by the early progress we made in targeting new physician specialties, including extremities and trauma areas, which have been more resilient to the COVID-related headwinds compared to the more elective procedures that you see in this market. Respect to the overall operating environment that we experienced in Q4, we continue to see pockets of relative strength and improving trends, as well as areas that continue to experience more challenging trends related to the COVID pandemic. By way of reminder, during the first wave of the pandemic, we didn't have as large an impact as other companies because of the mix of our business outside of the major metropolitan areas of the U.S., So as the second wave of the pandemic has hit those non-metropolitan areas, we have seen and continue to see an impact on our business trends, specifically in the surgical sports medicine side of our business. But despite the continued headwinds from COVID, we were fortunate that our commercial strategy resulted in broader diversification of our product mix, of our revenue mix by product, by channel, by physician specialty and site of care, including the growth we've experienced in the office channels. all of which has contributed to having less exposure to the acute care and outpatient settings this past year. In summary, we are very pleased with our revenue performance in the fourth quarter, where we reported 43% sales growth despite the continued challenging operating environment. We're also pleased with the significant improvement in our profitability in Q4 as evidenced by the 20% operating margins, positive gap net income, and generating $25 million in adjusted EBITDA this quarter. These financial results were well ahead of our guidance ranges and reflect the underlying profitability potential in our business in the years to come. Importantly, we are proud that we achieved this important profitability milestones well in advance of the stated interim period financial targets we've been discussing with the financial community over the last several years. We also generated more than $26 million in cash flow from operations in the fourth quarter. We further strengthened our balance sheet with an underwritten public offering of common stock, which raised approximately $60 million of net proceeds, and we used the strong cash flow from operations we generated in Q4 along with a portion of the net proceeds from our common stock offering to pay down $29 million of our line of credit borrowings during the period and we ended the quarter with more than $84 million in cash. The material improvement of our financial condition during the second half of 2020 leaves us well capitalized to execute in our strategic growth initiatives going forward. Turning to a brief review of our recent operating highlights, in addition to the appointment of our new chief financial officer, David Francisco, we have made important regulatory and clinical announcements in the recent months. both of which are for Renu, our cryopreserved amniotic suspension allograft, for the management of symptoms associated with knee osteoarthritis, or OA for short. On January 11th, we announced that the FDA granted Renu regenerative medicine advanced therapy designation, or RMAT, status. Securing RMAT designation is a significant milestone for Renu that not only underscores the potential impact of this therapy, for knee osteoarthritis, but also provides us with key regulatory advantages, including potential priority review of our BLA and potential ways to support accelerated approval of the license. On January 14th, we announced the first patient had been enrolled in our pivotal Phase III clinical trial, evaluating the safety and efficacy of Renu for the management of symptoms associated with knee OA. Together with the RMAT designation, this underscores the strength of our existing Renu clinical evidence and its potential to address a largely unmet medical need. We look forward to leveraging our RMAT designation to work closely with the FDA to expedite the review of Renu as the study progresses. With that, let me turn the call over to David for a review of our financial results for the fourth quarter, our balance sheet and financial condition as of the end of the year in a review of our 2021 revenue guidance that we introduced in this afternoon's press release. Dave?

Thank you, Gary. I'll begin with a review of our fourth 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 fourth quarter of 2020 was $106.8 million, compared to $74.6 million last year, an increase of $32.2 million, or 43%. Revenue from advanced wound care products for the fourth quarter of 2020 was $93.6 million compared to revenue of $63.4 million last year, an increase of $30.2 million, or 48%. Revenue from our surgical and sports medicine products for the fourth quarter of 2020 was $13.2 million compared to $11.3 million last year, an increase of $1.9 million, or 17%. was $45.3 million compared to $39.9 million last year, an increase of $5.4 million, or 13%. As of December 31, 2020, we had approximately 300 direct sales representatives compared to 265 at year-end 2019, and approximately 175 independent agencies compared to 160 at the end of 2019. Gross profit for the fourth quarter of 2020 was $81.3 million compared to $54.3 million last year, an increase of $27 million, or 50%. Gross margin for the fourth quarter of 2020 was 76% of revenue, compared to 73% last year, an increase of 340 basis points year over year. The increase in gross profit results primarily from increased sales volume due to strength in our advanced wound care and surgical sports medicine products, as well as a shift in product mix to our higher gross margin products. Operating expenses for the fourth quarter of 2020 were $59.5 million, compared to $56 million last year, an increase of $3.5 million, or 6%. The increase in operating expenses in the fourth quarter of 2020 was driven by a $2.7 million increase in research and development costs and a $0.8 million increase in general and administrative expenses, compared to the prior year period. The year-over-year increase in R&D expense was driven by an increase in process development costs associated with a new contract manufacturer, an increase in product costs associated with our pipeline products not yet commercialized, and an increase in the clinical study and related costs necessary to seek regulatory approvals for certain of our products. The year-over-year increase in selling general administrative expenses was driven by investments and additional headcount, primarily in our direct sales force, and increased sales commissions due to increased sales, as well as other selling costs, including credit card processing fees and royalties. Additionally, our fourth quarter operating expenses included $0.6 million in restructuring expenses, specifically employee retention and other benefit-related costs related to the company's restructuring activities. There were no restructuring expenses in the prior year. Operating income for the fourth quarter of 2020 was $21.8 million compared to an operating loss of $1.8 million last year, an increase of $23.5 million. Fourth quarter operating margin was 20% of sales, representing a year-over-year improvement in margin of 23 percentage points. Total other expenses for the fourth quarter of 2020 were $2.9 million compared to $2.6 million last year, an increase of $0.3 million or 11%. The increase was primarily due to higher interest expense resulting from increased average outstanding borrowings under the 2019 credit agreement compared to the prior year. Net income for the fourth quarter of 2020 was $18.5 million or $0.16 a share compared to a net loss of $4.4 million or $0.04 a share last year. an increase of $22.9 million, or 20 cents a share. Adjusted EBITDA was $24.9 million for the fourth quarter of 2020, compared to adjusted EBITDA of $0.8 million last year, an increase of $24.1 million. We have provided a full reconciliation of our adjusted EBITDA results in our earnings release, Form 8K and Form 10K, all of which were filed with the SEC this afternoon. Turning to a brief review of our financial results over the 12 months ended December 31, 2020, Net revenue for the full year 2020 period was $338.3 million compared to $261 million last year, an increase of $77.3 million, or 30%. The increase in net revenue was driven by a $73.9 million increase, or 33%, in net revenue of advanced wound care products, and a $3.4 million increase, or 9%, in net revenue of surgical and sports medicine products. Net revenue of Pure Apply products for the full year 2020 period was $147.3 million, compared to $126.8 million last year, an increase of $20.5 million, or 16%. Gross margins for the full-year 2020 period was 74%, compared to 71% last year, an increase of 330 basis points, and our operating margin for full-year 2020 was 8%, up more than 19 percentage points year-over-year as compared to the operating loss we reported for the full-year 2019 period. Net income for the full year 2020 period was $17.9 million or $0.16 a share compared to a net loss of $40.5 million or $0.44 a share last year. Adjusted EBITDA of $36.9 million for the full year 2020 period compared to adjusted EBITDA loss of $18.2 million last year. Now turning to the balance sheet, as of December 31, 2020, the company had $84.8 million in cash, approximately $30 million available borrowing capacity, and $84.8 million in total debt obligations. of which $15.1 million were capital lease obligations, compared to $60.4 million in cash, approximately $5 million of available borrowing capacity, and $100.6 million in total debt obligations, of which $17.5 million were capital lease obligations as of December 31, 2019. Net cash increased $24.4 million for the full year 2020 period and was driven by $42.5 million of cash provided by financing activities, $6.8 million of cash provided by operating activities and partially offset by $24.8 million used in investing activities. Turning now to a review of our 2021 revenue guidance, as detailed in our press release this afternoon, we introduced our fiscal year 2021 revenue guidance for the 12 months ending December 31st, 2021. The company expects net revenue of between $390 million and $405 million, representing an increase of approximately 15% to 20% year-over-year as compared to net revenue of $338.3 million for the 12 months ended December 31, 2020. The 2021 Net Revenue Guidance for Ages assumes net revenue from advanced wound care products of between $362 million and $375 million, representing an increase of approximately 23% to 27% year-over-year, compared to net revenue of $294.6 million for the 12 months ended December 31, 2020. Net revenue from surgical and sports medicine products of between $28 and $30 million, representing a decrease of approximately 31 to 36% year-over-year, as compared to net revenue of $43.7 million for the 12 months ended December 31, 2020. Net revenue from our sale of Purifly products of between $139 million and $147 million, representing flat to a decrease of approximately 6% year-over-year. as compared to net revenue of $147.3 million for the 12 months ended December 31, 2020. In addition to the formal revenue guidance, we would 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 to our total company net revenue growth in fiscal year 2021 will be sales of our amniotic products, which at the midpoint of our full-year range assumes amniotic growth of approximately 43% year-over-year in 2021. Second, we expect sales of our non-PureApply non-amniotic products, which collectively form the group called PMA and Other, to increase at the midpoint of the range approximately 18% year-over-year in 2021. Third, we expect to see steady improvement in COVID-related headwinds as we move through 2021. However, our guidance for the full year reflects stronger year-over-year growth in the first half of 2021 as compared to what the guidance reflects for growth in the second half of 2021. This is driven primarily by two factors. One relates to 2020. The other relates to an assumption in our guidance for 2021. Specifically, given the strong performance in the advanced wound care business in 2020, we expect to see our year-over-year growth trends in the over the second half of 2021 moderate as we lap the 56% growth we reported over the second half of 2020. While we expect an operating environment in the second half of 2021 to benefit growth trends in our surgical and sports medicine business, our 2021 revenue guidance assumes a significant headwind to sales in our surgical and sports medicine business related to the expiration of the FDA's grace period for enforcement of the existing regulatory criteria for products under Section 361, HCTP, which is scheduled to occur on May 31st, 2021. Importantly, we believe this applies only to our new sell and renew products. Pending additional clarity on the continued ability to sell these products in advance of receiving BLA approval, we have elected to issue our 2021 guidance assuming no contribution from the sales of renew and new sell products beginning June 1st, 2021. This represents a headwind to growth over the last seven months of 2021 of approximately $1,800. Finally, with respect to expectations around financial performance in 2021, we expect to report gap net income and positive adjusted EBITDA for the full fiscal year of 2021 period. In addition to our formal financial guidance for 2021, in addition to our, yeah, sorry, excuse me. We're providing some considerations for modeling purposes. For the full year 2021 period, We expect gross margins of approximately 75%, total GAAP operating expenses to increase approximately 22% year-over-year, inclusive of growth investments and the normalization of the 2020 GAAP operating expenses, total interest and other expenses of approximately $9 million, non-cash DNA of approximately $9 million, non-cash stock comp of approximately $3 million, and a weighted average diluted shares of approximately 128 million shares. With that, operator, I'll turn it back to you.