Organogenesis Holdings Inc.

Good afternoon, ladies and gentlemen, and welcome to the first quarter 2021 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 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 the 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 this 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. Gohini Sr., Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir.

Thank you, Jeff, and welcome everyone to Organogenesis Holdings' first quarter 2021 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 will cover today during our prepared remarks. I'll start with an overview of our revenue performance in the first quarter and a review of the key drivers of the impressive growth our team delivered despite the challenging operating environment. I'll then share a brief review of our operating highlights for the first quarter. And after my opening remarks, Dave will provide you with a more in-depth review of our first quarter financial results and the formal guidance for 2021 that we updated in this afternoon's press release. And then we'll open the floor. and the calls, rather, for questions. Beginning with the review of our first quarter revenue performance, I am pleased to report that we had another strong quarter in which we delivered strong financial results while making excellent progress advancing our strategic priorities. During the first quarter, we reported total revenue growth of 66% year over year, driven by 77% growth in our advanced wound care products. and 13% growth in the sales of our surgical and sports medicine products compared to the prior year. Our better than expected growth in Q1 reflects a continuation of the key drivers of our growth strategy, including the benefits of our comprehensive portfolio of products, the investments that we've made to broaden our reach by expanding our sales force, and the strong execution of our commercial strategy, focusing on leveraging multiple channels, new product introductions, and brand loyalty. Let me provide some color on how each of these longer-term drivers of growth contributed to the strong revenue performance in the first quarter. First, the sale of our amniotic portfolio were the largest contributors to our year-over-year growth in Q1. While our broad portfolio of products and services remains a key differentiator for us, the demand for our amniotic products from our advanced wound care customers was notable throughout 2020, and as expected, these strong demand trends continued in the first quarter of 2021. We are pleased with the growing awareness of our amniotic portfolio's differentiated features that our customers truly value. Additionally, our efforts to increase the body of clinical evidence demonstrating the benefits of our amniotic portfolio continues to pay dividends, not only in terms of increasing clinician awareness, but also in supporting our discussions with payers as we look to increase our commercial coverage in the coming years. Second, our strategy to broaden the reach of our products continues to drive value. We have been focusing on expanding into new physician specialties, multiple sites of care, and on leveraging our new product introduction to fuel our growth. And consistent with what we've experienced in the last quarter, Pure Apply's performance in the first quarter further validates the benefits of these strategic initiatives. In the first quarter, Pure Apply sales increased 27% year over year, well ahead of our expectations. And we are very proud of our Q1 results, as we believe it reflects the strong execution of the strategy to navigate the loss of pure applied pass-through status and the corresponding headwinds related to this change in reimbursement. We have repositioned the product with additional clinical data, additional sites of care, and additional physician specialties. Clinicians continue to value the product's differentiation, and we continue to see the number of accounts utilizing pure apply aided in part by strong sales of our five new products and line extensions introduced in 2020, four of which were launched in the fourth quarter. Our office strategy is our third area of notable strength in Q1. We have been working on penetrating the office market primarily with channel-specific product offerings and more recently further leveraging our channel expansion through the acquisition of CPN Bioscience. As a result, we continue to expand the number of customers in the office channel, and we are seeing increasing utilization of our products from existing customers. Additionally, the strong revenue results we are delivering in the advanced wound care business over the last year would not be possible without the strong execution of our commercial team. We've made significant investments to grow our team of direct representatives in the recent years, and we believe our team of 290 direct reps represents a key competitive advantage for organogenesis. Our first quarter revenue results clearly benefited from the investments we've made to grow our direct commercial team. Finally, our first quarter sales results benefited from better-than-expected sales of our surgical and sports medicine products, which increased 13% year-over-year in Q1. We believe our Q1 sales results reflect strong performance considering the COVID-related headwinds that impact elective procedures beginning in December and through the month of January. While our surgical and sports medicine business face continued challenges in the operating environment during the first half of the quarter, we're pleased to see improving trends as we move through the first quarter, culminating with very strong growth in the month of March. albeit against an easier comparison given the impact of COVID in the second half of March of 2020. First quarter sales results in our surgical sports medicine business continue to benefit from early progress in our strategy to target new physician specialties, including the extremities and trauma areas, which have been more resilient to the COVID-related headwinds compared to the more elective procedures in this market. With respect to the overall operating environment in the first quarter, 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. We continue to see the pace of recovery in our advanced wound care business outpace our surgical and sports medicine business. Our wound care business showed signs of improving patient traffic in the first quarter. However, the pace of recovery continues to vary depending upon the region of the country and the sites of care. Specifically, we saw better overall patient throughput in the office channel with customers in the hospital outpatient departments and wound care channels still continuing to operate below the pre-COVID levels. Despite the continued headwinds from COVID, we were fortunate that our commercial strategy resulted in a broader diversification of our revenue mix by product, channel, physician specialty, and site of care, including the growth we've experienced in the office channel overall. all of which have contributed to having less exposure to the acute care or outpatient settings, which continue to see tougher COVID-related headwinds. So in summary, we are very pleased with the revenue performance in the first quarter, where we reported 66% sales growth, despite the continued challenging environment as the U.S. continues to recover from the pandemic. We're also pleased with the significant improvement in our profitability in Q1, as evidenced by the 14% operating margins a $26 million improvement in year-over-year gap net income to more than $9.9 million, and impressive growth in our adjusted EBITDA this quarter. These financial results reflect the underlying profitability potential of our business in the years to come. Before I turn the call over to Dave, we wanted to provide some formal update on our thinking on the pending FDA enforcement deadline. On April 21st, the FDA reaffirmed that the period of enforcement discretion would not be extended and would end on May 31st, 2021. At an industry meeting last week, Dr. Peter Marks, the CBER Center Director, stated that companies should not commercialize 351 products after May 31st, 2021 under an NDA. As a result, we plan to take Renew and NewSell off the market effective June 1st. With that, let me turn the call over to Dave for a review of our financial results in the first quarter, our balance sheet and financial condition at the end of the quarter, and a review of the 2021 financial guidance we updated in this afternoon's press release. Dave.

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. As Gary mentioned, we were pleased with our strong start to 2021. Net revenue for the first quarter of 2021 was 102.6 million compared to 61.7 million last year, an increase of 40.6 million or 66%. Revenue from advanced wound care products for the first quarter of 2021 was 90.7 million compared to revenue of 51.3 million last year, an increase of 39.4 million or 77%. Revenue from our surgical and sports medicine products for the first quarter of 2021 was $11.8 million compared to $10.4 million last year, an increase of $1.4 million, or 13%. And lastly, revenue from our Pure Apply products for the first quarter of 2021 was $41.3 million compared to $32.5 million last year, an increase of $8.8 million, or 27%. As of March 31, 2020, we had approximately 290 direct sales representatives compared to 300 at year-end 2020. continue to expect to end 2020 with approximately 340 direct reps. Gross profit for the first quarter of 2021 was $77.1 million compared to $42.9 million last year, an increase of $34.1 million or 79%. Gross margin for the first quarter of 2021 was 75% of revenue compared to 70% last year, an increase of 560 basis points year over year. The increase in gross profit resulted primarily from increased sales volume as well as a shift in product mix to our higher gross margin products. Operating expenses for the first quarter of 2021 were $64.4 million compared to $58 million last year, an increase of $6.4 million, or 11%. The increase in operating expenses in the first quarter of 2021 was driven by a $5.6 million increase in selling and general administrative expenses. and a $0.8 million increase in research and development costs compared to the prior year period. The year-over-year increase in selling general and administrative expense was primarily due to a $9.4 million increase related to additional headcount, primarily in our direct sales force, and an increased sales commission due to increased sales, partially offset by a $4.4 million decrease related to reduced travel and marketing programs amid travel restrictions in place due to COVID-19. The first quarter of 2021 operating expenses also included $0.9 million of restructuring costs associated with the closing of our La Jolla office, which did not impact prior year financial results. The year-over-year increase in R&D expense was driven by an increase in product costs associated with our pipeline products and an increase in clinical study and related costs necessary to seek regulatory approvals for certain of our products. Operating income for the first quarter of 2021 was $12.6 million. compared to an operating loss of $15.1 million last year, an increase of $27.7 million. First quarter operating margin was 12% of sales, representing a year-over-year improvement in margin of 37 percentage points. Total other expenses for the first quarter of 2021 were $2.5 million compared to $1.2 million last year, an increase of $1.3 million, or 107%. This increase was primarily due to $1.3 million gains related to a litigation settlement in the first quarter of 2020. Excluding this item from the prior period results, our total expenses decreased by $0.3 million, or 7% year over year, driven primarily by lower interest expense related to lower average borrowings compared to the prior year period. Net income for the first quarter of 2021 was $9.9 million, or $0.07 a share, compared to a net loss of $16.3 million, or $0.16 per share. Last year, an increase of $26.3 million, or $0.23 a share. Adjusted EBITDA of $16 million for the first quarter of 2021 compared to adjusted EBITDA loss of $13.1 million last year, an increase of $29.4 million. We have provided a full reconciliation of our adjusted EBITDA results and our early earnings release issued this afternoon. Turning to the balance sheet, as of March 31, 2021, the company had $78 million in cash and restricted cash and $88.1 million in debt obligations, of which $18.4 million were capital lease obligations. compared to $84.8 million in cash and restricted cash and $84.8 million in debt obligations, of which $15.1 million were capital lease obligations as of December 31, 2020. Turning to a review of our 2021 revenue guidance, as detailed in our press release this afternoon, we have updated our fiscal year 2021 revenue guidance for the 12 months ending December 31, 2021. The company now expects net revenue between $438 million and $454 million, representing an increase of approximately 29% to 34% year-over-year, as compared to net revenue of $338.3 million for the 12 months ended December 31, 2020. This compares to our prior revenue guidance range of $390 million to $405 million. The 2021 net revenue guidance range assumes net revenue from advanced wound care products of between $409 million and $422 million, representing an increase of approximately 39% to 43% year-over-year. Net revenue from surgical and sports medicine products of between $29 million and $32 million, representing a decrease of approximately 27% to 34% year-over-year. Lastly, given the strong growth in the PureApply brand over the last two quarters, we're expecting net revenue from the sale of PureApply products of between $179 million and $187 million, representing an increase of approximately 22% to 27% year-over-year. In addition to the formal revenue guidance, we'd also like to provide a few considerations for investors to bear in mind when evaluating our growth expectations for fiscal 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 for fiscal year 2021 will be sales of our amniotic products, which at the midpoint of our full year total revenue range now assumes amniotic growth of approximately 48% year-over-year in 2021. This compares to our prior incorrect guidance range, which assumed growth at the midpoint, of approximately 43% year-over-year. Second, we expect sales of our remaining non-peer-applied, non-amniotic products, which collectively form the group PMA and other, to increase at the midpoint of the range, approximately 20% year-over-year in 2021. This compares to our prior guidance range, which assumed growth at the midpoint of approximately 18% year-over-year. Third, we see a steady improvement in COVID-related headwinds as we move through 2021. However, our guidance for the full year continues to reflect 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. As a reminder, this is driven by two factors. One relates to 2020, the other relates to our guidance for 2021. Specifically, given the strong performance of the advanced wound care business in 2020, We expect to see our year-over-year growth trends over the second half of 2021 moderate as we lap the 56% growth we reported over the second half of 2020. As discussed in our fourth quarter earnings call, while we continue to expect an improving 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 on May 31st, 2021. Our 2021 revenue guidance continues to assume no contribution from the sales of renew and new sale products beginning June 1st, 2021. This continues to represent a headwind to growth over the last seven months of 2021 of approximately $18 million. With respect to our expectations for financial performance in 2021, we expect to report positive GAAP net income and positive adjusted EBITDA for the full fiscal 2021 period. In addition to our formal financial guidance for 2021, we are providing some consideration for modeling purposes. For the full year of 2021 period, we expect gross margins of approximately 75%, total GAAP operating expenses to increase approximately 25% year-over-year. This compares to our prior expectation for an increase of approximately 22% year-over-year, which reflects the incremental selling expense related to the increase in full year 2021 revenue expectations. Note our 2021 GAAP operating expenses include approximately $4.9 million of restructuring expenses related to our La Jolla, California facility, of which approximately $0.9 million occurred in the first quarter of 2021. Total interest and other expenses of approximately $9 million, non-cash DNA of approximately $9 million, non-cash stock comp of about approximately $3 million, weighted average diluted shares of approximately $134 million, and we expect our full-year 2021 capex of approximately $36 million of which approximately two-thirds is related to our growth and gross margin improvement initiatives. With that, operator, I'll turn the call back to you.