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spk04: 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.
spk11: 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.
spk09: 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.
spk04: Thank you, sir. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star 1. And our first question will come from the line of Matt Mixick from Credit Suisse. Your line is open.
spk07: Hi, good evening. Thanks for taking our question. And congrats on a really strong quarter and revised outlook here. So I had one question. on some of the top line trends and one follow-up on the P&L. So in terms of, if I could ask to maybe Gary, if you could clarify this, you know, where the raise, you know, I think the raise comes in as impressive and welcome, of course, you know, more than the beat. But, you know, The ability to raise, I guess, this much and also sort of still confirm that you're really not going to be selling any of these two products, Renew and New Cell. It's a pretty dramatic change from where you maybe left Q4. Maybe walk us through that again, the math, just one more time, and what gives you the confidence to deliver that sort of upside to your full guidance at this point.
spk11: Sure. Sure. So I think PureApply is probably the most important change in our guidance. Obviously, PureApply performed extremely well in Q1. And we had four product launches, as you know, right at the end of Q4. And it was one of the areas that we focused on to see if those products would continue to grow as they did. And Q1 and all trends right now are very positive for all of the five products that we put out in 2020. Before them came out late in the fourth quarter, and they're all growing extremely well. So that gives us a lot of confidence that the brand continues to grow and continues to expand in multiple sites of care, as we've discussed as part of our strategy. So that's given us a lot of confidence. Our amnions continue to grow. Our capacity, you know, our goal is to have two and a half times the capacity of affinity this year versus 2020. And we're on our way to seeing that happen. So we're pretty comfortable right now that the amount of affinity that we're able to produce will be meeting our goal of two and a half times. So I think the combination of those two and, you know, we're also seeing some positive trends. in access, particularly at the end of the quarter and here in May. Both in the outpatient setting for wound care and we started to see improvement in trends depending upon the region in the surgical sports medicine area as well. So we've just got a lot of positive tailwinds that are kind of pushing us along that's given us more confidence in the broader part of our business. not just one aspect of our business. I don't know, Dave.
spk07: That's super helpful.
spk09: No, I think you're absolutely right. I mean, it's just the strength and pure apply of the last two quarters really gave us the confidence to increase that by quite a bit and strengthen the amnions as well. Agreed.
spk07: And just maybe before I go to the P&L, just to clarify, I mean, I think you framed last quarter that, you know, your guidance didn't include – you know, the products that are at risk of enforcement or not really knowing which way the FDA would act. They've been more clear, I guess, in how they'd like the industry to think about commercialization post-May 31st. Is that where we end here, or what's the process going forward for these products? And then, as I mentioned, I do have just one quick follow-up on the P&L if I could.
spk11: No, I think you've interpreted it correctly. I think it ends for these products until you get through the BLA process. So there certainly will be fewer products, I assume, in the market post-BLA approval. So our focus is to get through the trial as quickly as we can and put as many resources as possible to make sure that it's a successful trial. But I don't think... I don't think there's any confusion or lack of clarity any longer. The FDA has been clear 351s should not be sold post-May 31st.
spk07: Okay. Fair enough. Maybe it raises the value of these products on the other side of that, but we'll have to see how that plays out. On the P&L, this is an area where, if I could interpret your comments over the past couple of quarters, the growth has been you know, at times really strong, maybe too strong for you to sort of almost catch up with the spend behind that or in support of that. You know, you showed some outsized gains in EBITDA in the back half of last year, which you talked about moderating. And then I think you've sort of exceeded expectations again here in the first quarter. Maybe help us understand the pace of, growth in spending, or if there's a catch-up that we should be thinking about here in Q2 or Q3, or how we should be modeling this idea of a positive EBITDA number for the full year, but maybe some more shape to that trend.
spk09: Yeah, so we did give you some guidance about the 22% up for the full year. Obviously, Q1 was nowhere near that on a year-over-year basis, but recognize that we did still have COVID savings, you know, so we lapped that next quarter, and we expect to see some increased spending that will not continue on those savings standpoint. And then additionally, you know, we'll continue to add reps, and as we continue to grow throughout the year, we'll continue to have incremental commission expense. And then also on the R&D side, it was a little light, and so we expect to continue to push harder on those clinical spending and increase that cadence as well.
spk07: Okay. All right, Nolan. Get back in queue. Thanks so much.
spk11: Thanks, Matt.
spk04: Your next question comes from the line of Brian Zimmerman from BTIG. Your line is open.
spk08: All right. Good afternoon and congrats. Really impressive. I want to ask maybe a bigger picture question, Gary. Two-part question, but You know, the longer-term revenue outlook for Organogenesis, I think, you know, initially it was around 10% to 15% when you guys came public, and then longer-term, I think it was in the mid-teens. Is your view of that outlook changed at all, given how strong the performance has been? And then, you know, the second part of that question that dovetails with it is, you know, if you could talk a little bit about the strength you're seeing, this growth you're seeing here that we're seeing in the numbers here, Is this a reflection of share dynamics, or are you seeing an uptick in market growth broadly in advanced wound care? Just because it is pretty astounding.
spk11: Sure. Well, thank you. So, as it relates to our long-term growth, I think we have guided recently to low to mid-teens grower after this year. Obviously, the comp gets hotter as the revenue continues to grow. But we think we're a little more bullish on the company's growth as a result of the success of our new product launches. When we first came out, obviously, those products were not in the market. And I think that's been very helpful. And we think low to mid-teens grower over the next several years is still possible for the company. I don't know, Dave, if you have any other thoughts.
spk09: Yeah, I mean, there's an element of the law of large numbers too, right? So there could be moderation from that standpoint as well.
spk11: And I think when we see the number of patients that we're treating and the number of accounts that we're acquiring as customers, we definitely feel that there's a market shift in our favor. So we definitely see that happening in the market, and some of the other dynamics from some of the other competitors seems to reflect that. We also think with our expansion in the office channel, we really are expanding the market. There's a lot of offices that have dabbled in wound care and are now starting to participate with advanced wound care products and starting to get educated on advanced wound care products, starting to treat more patients in more types of wounds in the office. and that is something that we think will continue to grow. So it's a combination of market share shift and just expanding the market with multiple channels. Again, the physician specialties that we talk about often that we now serve, we never had sold in some of those markets before, and for indications that we've never sold to before. So it's a combination of all of that that is really helping to drive the revenue.
spk08: Okay. Okay. Fair enough. And then the thing about peer apply, I mean, you know, you were facing headwinds, you know, pretty significant headwinds on pricing given the loss of pass-through. And you've clearly demonstrated the ability to work through that with the products introduced. And so I was wondering if you could talk a little bit about kind of how you think about, you know, the adoption of peer apply going forward in light of what is now two quarters of of really strong, you know, growth beyond, in the face of these headwinds, these pricing headwinds from the loss of pass-through.
spk11: Well, with the multiple sites of care, you know, that I've mentioned often, you know, we sell a lot of PurePly, you know, in the hospital today. We sell it, obviously, in the office. We have multiple sizes for different types of wounds. You know, it's sold in different physician specialties, so the market is still, you know, young for this product. The procedures that could utilize this technology and the physician specialties that are getting introduced to the technology continues to advance. So we see PurePly being a nice grower for us for many years to come. Okay.
spk08: I'll hop back in queue. Congrats again, guys. Very impressive.
spk11: Thanks, Ryan.
spk04: Your next question comes from the line of Richard Newiter from SVD Lyrinc. Your line is open.
spk03: Thanks for taking the questions. And just to echo, nice quarter. Congrats on the performance. Maybe I can just start off on the regulatory change. And rather than so much what that means for you guys in stopping selling, what does that mean For the industry and others who have to stop selling that potentially go away, my understanding there are a lot of smaller players that were selling products like this that are going to have to stop. Maybe talk a little bit about what that means for you guys from an incremental share gain opportunity standpoint, and is any of that factored into your guidance increase?
spk11: Well, certainly none of it's factored into our guidance increase. We haven't guided to it any sales posts. May 31st. But clearly, there's going to be a change in the market. Not everyone is going to be, you know, going down the BLA pathway. So, there'll be fewer products on the market, you know, on the other side. You know, we think that's a positive thing. Obviously, our expectation is we certainly would like to be on the other side if we're successful with our BLA. So, we just think it's a positive thing. In the interim, it's certainly a painful thing. For us, it's not as significant. of a business for us today as some others. So I think it depends on the company. The pain will be a little different based on how much of that revenue is part of the revenue mix for that particular company. But there's going to be fewer, without question, players in the market immediately and then post-BLA.
spk03: Thank you. And then just thinking about PurePly and Affinity, in the past, you've said, I believe, that you thought Affinity could eventually be as big, if not bigger, than PurePly, Gary. And PurePly, your PurePly outlook continues to creep higher. It easily looks like it'll be more than the $200 million product based on our math in 2022 and beyond. So I guess, one, do you still... feel like that comment holds relative to the levels that Puraply appears to be reaching. And then just on affinity, were there any capacity constraints this quarter such that demand without shipping supply, and when does that self-correct?
spk11: Your first question about affinity surpassing Puraply, Puraply is certainly making it more and more of a challenge now. for that to happen based on the success of the product. But yes, we do believe it still has the potential to be our largest product over time, even with the success of Puriply. Though, as I said, Puriply is making that a little bit more challenging. We had no issues with supply. We actually were able to increase the amount of capacity and increased our yield. So we're feeling pretty good about where we are today. But it's important to note, too, that as we increase our capacity, we want to see that capacity to be stable before we allocate those units to our commercial organization because we certainly want to be sure that we're a reliable supplier for our customers. So our capacity is going up. We're starting to increase allocations. But we're very cautious to make sure that that capacity is sustainable going forward.
spk03: Okay. Thanks a lot, Gareth.
spk11: Thank you.
spk04: Again, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. Your next question comes from the line of Steven Lickman from Oppenheimer. Your line is open.
spk02: Thank you. Hi, guys. Congratulations on the quarter. Just wanted to touch base on the amnions. It sets you to build on Affinity, I believe, later this year with NovaCore. Gary, are you still on target to launch that around year-end? How do you see NovaCore for building upon the success of your current franchise?
spk11: Sure. We do expect to be launching NovaCore at the very end of the year. It won't be a contributor really until 2022. for sure, probably the second half of 22. So as you may recall, Novacor shares the manufacturing facility with Affinity. So we're balancing the capacity of both of those products. So we see Novacor as just being unique, like Affinity, the sister product. It has unique properties. It's a little bit different than Affinity, so it has a little more utility in certain wound types. So it gives us more flexibility. And we think, you know, it'll perform, you know, extremely well, like Affinity does, and gives us options and flexibility in both sites of care and types of wounds. So we're pretty comfortable and confident that Novacor will be a strong contributor, you know, in 2022 and beyond.
spk02: Great. And then just secondly, you know, obviously CP and biosciences has been a solid acquisition for you guys. the state of the business and the EBITDA, should we be thinking about potential additional additions on either side of your businesses to bolster or opportunities for synergy looking ahead?
spk11: Well, we're certainly always looking for opportunities for products and channel expansion for sure. And we're hoping that we'll be able to add to our portfolio this year. which will enhance not only the office channel but certainly in the surgical side of the business as well. We're expanding our reach into the extremities and trauma area with our existing portfolio. That's a pretty exciting area for us, and we'd like to continue to increase and strengthen our portfolio in that area as well.
spk02: Great.
spk04: Congratulations, guys.
spk11: Thank you very much.
spk04: We are currently showing no remaining questions in the queue at this time. That does conclude our conference call for today.
spk01: Thank you for your participation.
spk03: Thank you. Thank you. Thank you.
spk06: Thank you. Good afternoon, ladies and gentlemen.
spk04: And welcome to the first quarter 2021 earnings conference call for Organogenesis Holdings Incorporated. 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.
spk11: 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 applied 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. And 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 New Sell off the market effective June 1. 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.
spk09: 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 PureApply 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 a $1.3 million gain due 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 29.3 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 Pure Apply brand over the last two quarters, we're expecting net revenue from the sale of Pure Apply 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.
spk04: Thank you, sir. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask
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