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spk00: Good afternoon, ladies and gentlemen, and welcome to the fourth quarter 2021 earnings conference call for Organogenesis Holdings, Inc. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and absentees that could cause actual results to differ materially from those indicated, including the risks and absentees described in the company's filings with the Securities and Exchange Commission, including item 1a risk factors of the company's most recent annual report. You are cautioned not to place undue reliance upon any forward-looking statements which speak only as of the date made, although you 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 GAAP. We generally refer to as non-GAAP financial measures Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in curtains 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. Gilheny, Sr., Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir.
spk02: Thank you, operator, and welcome everyone to Organogenesis Holdings' fourth 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'll cover today during our prepared remarks. I will start with a high level review of our fourth quarter and full year results, including our commercial operating and financial highlights. I'll then provide a review of the progress we've made against our strategic initiatives in 2021 as well as some color on our growth expectations for 2022. After my opening remarks, Dave will provide you with a more in-depth review of our fourth quarter financial results, our balance sheet, and financial condition at year end, and the financial guidance for 2022 that we included in this afternoon's press release, and then we'll open it up for questions. Let me begin with a review of our results for Q4. another quarter of strong performance, rounding out a transformative year for the company. We reported net revenue growth of 20% year-over-year to $128.6 million, driven by 30% growth in our advanced wound care products, which offset a 45% decrease in the sale of surgical and sports medicine products. In the quarter, both segments exceeded our expectations, driven primarily by the strength in our amniotic franchise. As expected, the decline in surgical sports medicine reflects the headwinds of our renew and new-sell products following the expiration of the FDA enforcement grace period on May 31st. Excluding net revenues from these products, total net revenue increased 28% year-over-year on an adjusted basis in the fourth quarter. In addition to a better-than-expected net revenue result in Q4, we generated strong adjusted EBITDA of more than $26 million, representing a 20.5% of sales in the period. Turning to our results for the full year, net revenue increased 38% year-over-year and increased 45% year-over-year on an adjusted basis. In addition to the impressive net revenue growth in 2021, we delivered notable financial performance as well. The combination of increasing gross margins and strong operating leverage resulted in more than $89 million of adjusted EBITDA this year. Our fourth quarter and fiscal year 2021 net revenue results reflect the continuation of the key drivers of our growth strategy and competitive advantages we have discussed in recent years, including the investments we've made to expand our sales force, the benefits of our comprehensive and differentiated portfolio of products, that address patient needs to treat wounds across all stages of the healing process, and strong execution of our commercial strategy focused on leveraging multiple channels, new product introductions, and brand loyalty. Let me update you on the progress of each of these in 2021. First, we made significant investments to grow our team of direct sales representatives. We ended 2021 with 340 direct sales representatives compared to 300 at the end of 2020, an increase of 13% year-over-year. And we've prioritized this area of investment over the last four years, and as a result, the number of direct sales representatives have increased at a CAGR of 15% since the end of 2017. Our fourth quarter and fiscal year 2021 net revenue results clearly benefited from the investments we've made to grow our direct commercial team in the recent years. Second, our comprehensive portfolio of products is a key competitive advantage for Organogenesis and continues to be a primary driver of our impressive growth in recent years. Our PureApply franchise performed extremely well in the fourth quarter in full year, growing 38% and 35% respectively. PureApply is a well-established, unique, patent-protected brand. It's the only skin substitute on the market with purified collagen and PHMB, a broad spectrum antimicrobial, for all wounds except for third degree burns. Puriply is backed with proven clinical outcomes, is highly efficacious in the early stages of wound healing, and therefore remains a key component to the healing algorithm from our clinicians and patients. We've strategically expanded the brand since we launched the product in 2015. bringing new products and line extensions to address varying wound attributes across size, depth, and complexity. These new products and line extensions have enabled access to multiple sites of care and physician specialties and continue to drive strong demand for the brand. Our portfolio of highly differentiated amniotic products continues to experience strong net revenue growth, with sales increasing 15% year-on-year. over year in Q4, and up 38% on an adjusted basis, which exceeded our expectations. Lastly, our PMA and other products, net revenue declined 8% year-over-year in the fourth quarter, reflecting COVID headwinds for Applegraph and Dermagraph in the HOB PD setting, their primary site of care. But for the full year, our PMA and other products grew 12% year-over-year. Finally, we continue to make progress in diversifying our revenue through the sale into new physician specialties and across multiple sites of care led by target product development and commercial strategies to win in these adjacent channels. The breadth of our portfolio, increased awareness of the benefits of our advanced modalities and our broad commercial reach are the key success factors for this strategic imperative. We continue to expand the number of customers across various sites of care and experience strong growth in new physician specialties in Q4 and for the full year of 2021. Respect to the overall operating environment in the fourth quarter, as highlighted on our Q3 call, we continue to experience healthcare facilities implementing COVID-related restrictions on access. Nonetheless, our strategic initiatives focus on leveraging our technology platforms and product portfolio Diversifying our revenue source and expanding our commercial reach allowed us to drive 28% growth in net revenue on adjusted basis despite the challenging operating environment. To recap the takeaways for Q4, we delivered another quarter of strong growth and impressive financial performance against difficult comparisons in the prior year. Our team executed very well despite the challenging operating environment and we made progress towards our strategic initiatives. As I reflect back in 2021, we entered this year building off a strong foundation from 2020, where our team's strong execution of our strategic plan resulted in impressive operating and financial results. Despite the unprecedented challenges related to the pandemic in 2020, we delivered 30% net growth and a significant improvement in our profitability as we generated over $49 million in of adjusted EBITDA over the second half of 2020. In 2021, we were able to deliver another extraordinary year of financial performance with adjusted net revenue growth of 45% and adjusted EBITDA margins of 19%. We generated more than $89 million of adjusted EBITDA in 2021, and we ended the year with the strongest balance sheet in financial condition in the company's history. In addition to the financial performance, we made great progress against our strategic initiatives, including strengthening our commercial team, a key competitive advantage for us in the market, ending the year with 340 direct sales reps. We increased our amniotic capacity by three times, exceeding our goal of 2.5 times by year end. We made significant progress in our multi-year plan to consolidate our manufacturing operations from California into Massachusetts to reduce the company's cost structure as part of our long-term goal to achieve 80% gross margin. We also opened up our La Jolla Innovation Center, continuing our heritage of strong research and development. We've expanded our clinical evidence with six new publications supporting the efficacy of our products. And finally, we strengthen our board of directors, adding two new independent directors with the appointment of Pratyusha Durababu and Michael Driscoll. I'm proud of our team's dedication and strong execution in 2021. Before I turn the call over to Dave, let me review our 2022 net revenue guidance, which we introduced in this afternoon's press release. For the full year, 2022 period, we expect net revenues in the range of $485 million to $515 million, representing growth of 4% to 10% year-over-year and 6% to 13% on an adjusted basis. Our as-reported growth expectation for 2022 reflect the continuation of our multi-year strategic growth initiatives, which has resulted in net revenue CAGR of 34% from 2018 to 2021. We continue to believe that the long-term growth opportunity for organogenesis is very compelling, and we remain confident in our long-term target of sustainable low double-digit growth. That said, there are three key headwinds to bear in mind when evaluating the as-reported growth range implied by our 2022 guidance. First, 2021 net revenue included sales of our renew and new sale products through May 31, 2021, which marked the expiration of the FDA's grace period. Second, our 2021 net revenue included the sales of our Dermagraph product. Dermagraph manufacturing was suspended in the fourth quarter of 2021 as part of our multi-year plan to consolidate our manufacturing facilities here in Canton on our campus. Third, our 2022 net revenue guidance reflects the impact of a more challenging operating environment, particularly in the first half of 2022. In January, rising Omicron cases impacted patient consultations, treatment and elective procedures, staffing shortages, increased restrictions and limitations on access challenged our ability to engage with new customers. Additionally, we face incremental headwinds in January as our own employees were impacted by the virus. Dave will share more color on the first quarter revenue expectations in a few moments, but it's important to note that we have seen a material improvement in our business trends after the challenging January period. We expect to see steady improvement in COVID-related headwinds as we move through the first half of the year. and our guidance reflects a more favorable operating environment over the second half of 2022. Additionally, with the contributions to growth from new products coupled with an easier comparison, we expect accelerating growth into the back half of the year. While these items represent what we believe temporary headwinds to our year-over-year reported growth rate, the company's target multi-year growth profile has not changed. We are confident that continued execution of our strategic plan will result in strong adoption and utilization of our product solutions for the advanced wound care and surgical sports medicine markets. Our strategic plan also prioritizes continued operational progress, continued development and commercial introduction of highly innovative and highly efficacious products, and continue to improve our long-term profitability profile. We expect to continue to improve our position as a leader in the industry as we deliver on our mission to provide integrated healing solutions that substantially improve outcomes while lowering the overall cost of care. With that, let me turn the call over to Dave for a review of our financial results for the fourth quarter, our balance sheet, and financial condition as of the end of the quarter in a review of the 2022 financial guidance we introduced in this afternoon's press release.
spk06: Dave? Gary, thank you. I will 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. As Gary mentioned, we were pleased with the strong net revenue growth in the quarter given the challenging operating environment. Net revenue for the fourth quarter of 2021 was $128.6 million, up 20%, and excluding renew and new sell, we grew adjusted net revenue by 28%. Our advanced wound care net revenue for the fourth quarter of 2021 was $121.4 million, up 30%. And net revenue from surgical and sports medicine products for the fourth quarter of 2021 was $7.2 million, down 45%, driven by the impact on sales of our Renew and New Sell products, which we stopped marketing after May 31, 2021, due to the expiration of the FDA's enforcement grace period. Net revenue from Pure Apply products for the fourth quarter of 2021 was $62.6 million, up 38%. As Gary indicated earlier, we were pleased with the continued strong performance from the PureApply brand, with sales increasing 35% year-over-year in 2021. Gross profit for the fourth quarter of 2021 was $96 million, or approximately 75% of net revenue, compared to 76% last year. Operating expenses for the fourth quarter of 2021 were $75.5 million, compared to $59.7 million last year, an increase of $15.8 million, or 26%. The increase in operating expenses in the fourth quarter of 2021 was driven by a $13.9 million increase in selling, general, and administrative expenses and a $2 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 higher commissions related to the strong year-over-year increase in sales. The year-over-year increase in R&D was driven by planned step-up in clinical study spend and related costs necessary to seek regulatory approvals for certain of our products. Operating income for the fourth quarter of 2021 was $20.5 million compared to an operating income of $21.6 million last year, a decrease of $1.1 million, or 5%. Fourth quarter gap operating margin was 15.9% of net revenue, excluding the aforementioned $1.8 million of restructuring costs. Our non-gap operating margin was 17.3% in the fourth quarter of 2021. Total other expenses for the fourth quarter of 2021 were $0.9 million compared to $2.9 million last year, a decrease of $2 million or 70%, driven primarily by the reduced interest rate for borrowings under our new credit agreement signed in August 2021. Net income for the fourth quarter of 2021 was $51.7 million or $0.39 per share, compared to net income of $18.3 million or $0.15 a share last year, an increase of $33.4 million or $0.23 a share. Note fourth quarter net income included a benefit of $32 million in income taxes recognized resulting from the release of the valuation allowance previously recorded against a full amount of our net U.S. deferred tax assets. Adjusted EBITDA of $26.3 million for the fourth quarter of 2021, or 20.5% of net revenue, compared to adjusted EBITDA of $24.9 million, or 23% of net revenue, last year. We provided a full reconciliation of our adjusted EBITDA results in our earnings press release issued this afternoon. Turning to the balance sheet as of December 31st, 2021, the company had $114.5 million in cash, cash equivalents and restricted cash, and $73.6 million in total debt obligations, of which $0.2 million were capital lease obligations. It is compared to $84.8 million in cash, cash equivalents and restricted cash, and $84.8 million in debt obligations, of which $15.1 million were capital lease obligations as of December 31st, 2020. We also have up to $125 million of available borrowings on our revolving credit facility as of year-end, December 31, 2021. As Gary mentioned, the company's balance sheet and financial condition has never been stronger. Our improving profitability profile and related cash flow generation, along with our enhanced balance sheet and financial conditions, has well positioned us to continue to execute our strategic growth initiatives in the years to come. Turning to a review of our 2022 net revenue guidance, which we introduced in our press release this afternoon. For the 12 months ended December 31st, 2022, the company expects net revenue between $485 million and $515 million, representing an increase of approximately 4% to 10% year-over-year. The 2022 net revenue guidance range assumes net revenue from advanced wound care products increasing approximately 6% to 12% year-over-year, Net revenue from surgical and sports medicine products decreases approximately 9% to 19% year-over-year, and net revenue from the sale of our Purify products increases approximately 4% to 9% year-over-year. As Gary mentioned, our 2021 revenue results included approximately $11 million through May 31, 2021, the end of the grace period for our Renew and New Sell products. Excluding sales of Renew and New Sell for the first five months of 2021, our 2022 revenue revenue guidance implies growth of 6 to 13% on an adjusted basis. Additionally, 2021 revenue results include sales of our Dermagraph product of approximately $20 million. As Gary mentioned, we suspended manufacturing of Dermagraph at the end of the last year and will resume production upon completion of our new facility in Canton. In terms of our profitability guidance for 2022, the company expects to generate gap net income of between $56.5 million and $71.5 million adjusted net income of between $60.2 million and $75.2 million, EBITDA between $73.5 million and $88.9 million, and adjusted EBITDA between $79.9 million and $95.3 million. In addition to the formal net revenue guidance, we will also like to provide a few considerations for investors to bear in mind when evaluating our growth expectations for fiscal year 2022. This additional color is intended to help the investment community better understand the assumptions supporting our net revenue expectations for 2022. First, the largest contributor to our total company net revenue growth in fiscal year 2022 will be sales of our amniotic products, which at the midpoint of the full-year net revenue range assumes amniotic growth of approximately 12% year-over-year in 2022. Second, we expect our remaining non-peer-applied, non-amniotic products, which collectively form the group PMA and Other, to decrease at the midpoint of the range, approximately 5% year-over-year in 2022. Third, as Gary detailed earlier, we experienced COVID-related headwinds in January. And while our business trends have improved quarter to date, we expect our first quarter net revenue to decline between 5% and 8% year-over-year on a reported basis. Note, excluding the sales of Renew and Newsell from the prior period, our first quarter sales expectations reflect flat to down 3% on a year-over-year on an adjusted basis. Our 2022 net revenue guidance assumes modest improvement in the operating environment as we move through the first half of the year and a more normalized environment in the second half of 2022. Importantly, our guidance assumes stronger growth trends in the second half of 2022, driven by the combination of increasing contributions from planned new product launches, an assumption that we see progressive improvements in COVID-related headwinds, and a return to a more normalized operating environment. and an easier comparison related to renew and new sell not contributing to prior year sales beginning in June 1st, 2021. In addition to our formal financial guidance for 2022, we provide some considerations for modeling purposes. For the full year 2022 period, we expect gross margins of approximately 76%, total gap operating expenses to increase approximately 9% to 13% year-over-year, total interest and other expenses of approximately $3.5 million, non-cash DNA and non-cash stock expense of approximately $12 million and $6 million, respectively. Our weighted average diluted share count of approximately $134 million. We also expect our full year 2022 CapEx to approximately $70 to $75 million, with the year-over-year increase in CapEx reflecting the beginning of our multi-year manufacturing build-out of the Canton campus. With that, operator, I'll turn it back to you.
spk00: Thank you, sir. Ladies and gentlemen, 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 coming from the line of Ryan Zimmerman with BTIG. Your line is open.
spk05: Hey, thanks for taking the question. And it's nice to see all the progress that you guys have made this year. I guess to start, uh, For Gary or Dave, you know, I appreciate all the color on the guidance and when you back out renew and new sell. But I guess with Dermagraph, one, you know, that contribution kind of puts you at that maybe a mid-teens adjusted growth rate for 2022. When does that Canton facility, and I might have missed this, when does that Canton facility come back online and Dermagraph can start contributing?
spk06: It'll be in 2024.
spk05: Okay. So we shouldn't expect anything then in 2022. Okay. And then the second question I had was just around some of the dynamics you saw in the quarter. If I heard you correctly, amniotics were up, yet some of your PMA and other products were down pretty significantly. And I believe that some of that was related to COVID headwinds in the HOPD setting. But I'm wondering if you could kind of speak, Gary, to kind of that dichotomy in utilization between the amniotics versus, say, the PMA and other in the quarter.
spk02: Sure. So in the PMA, another, you're correct, it was the COVID headwinds. The primary site of care for our Applegraph, Dermagraph, PMA products is the HOPD, and that's where we saw the most impact of COVID as it related to access. So that's pretty clear from the data that we have that it's a direct result of just not having access into that site of care for those products. On the amniotic side, they did do well. They performed, exceeded our expectations. We did see a slight decline as expected in the first month and started to grow as expected and actually better than expected. We put a lot of time and focus on the amniotic portfolio in Q4 and it helped in exceeding our expectations.
spk05: Okay. If I can just squeeze one more in, you know, the reimbursement rates for antibiotics obviously was a big, you know, focus at the end of last year. There might be some dynamics that, you know, with the MACs in the first quarter. How much of the guidance in the first quarter, Dave, you know, reflects that headwind that you may see from MACs kind of readjusting their reimbursement? And if you can kind of, you know, give us, maybe help us understand that relative to say, the COVID dynamics as we think about the first quarter and the pacing through the year?
spk06: Yeah, so they're somewhat commingled, as we've talked about in the third quarter, right? So it's really that you're talking about the launch of Affinity, right? And as that moves forward, I think there is access challenges from that standpoint. But this team has got a tremendous amount of experience launching new products into these markets, and so obviously it's been incorporated into the guidance and plays into the first quarter and full year cadence that we just discussed.
spk05: Okay, thank you. I'll hop back in queue. Thanks for taking the questions.
spk00: Our next question coming from the line of Danielle Antolafi with SVB Learing. Your line is open.
spk01: Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on a strong end to the year. Just a question on, you know, one of the growth drivers and relatively new to the organogenesis story, but we spoke a few weeks ago at our conference about expansion into new channels like dermatology, and just wondering if you could talk a little bit more about how meaningful of a growth driver that expansion or into other new channels might be in 2022, and then I have one follow-up.
spk02: Sure, let me jump in, and Dave, you can jump in as well. So we certainly aren't going to get into all of our channel strategies, but we do expect growth in the surgical channel this year with some of our products. We also are seeing in certain specialties like dermatology nice growth, and that's one in particular that's growing quite nicely. So we do expect some growth support from those adjacent channels, but we certainly aren't guiding to exactly what those channel opportunities would be.
spk06: Yeah, I would agree. I think, you know, we've seen some good progress in 21, and that momentum continues into 22. And as Gary mentioned, it's incorporated into the guidance, but we don't typically split that out.
spk01: Yeah, understood. And I guess just a quick follow-up on that. I mean, when you are calling on new physician offices, is that one of the components, though, you're seeing in COVID surges? Like, for example, Omicron, it's a little bit more difficult to get into new offices. And have you seen that start to ease up?
spk02: We certainly did see it at the end of Q4 and into January. What it really impacted was bringing new products into the office. That was the challenge. Our traditional brand products did well and really helped with the growth in Q4 and will also help in Q1 and Q2 as well. But it was getting the new products introduced and getting them integrated into those facilities which was more of the challenge because of staffing issues.
spk01: Got it. And just one last question for me, and that's on the strength from a competitive positioning perspective and the full product portfolio and also the significant number of feet on the street. I guess how much of a competitive moat have you built there? There are other players in this market, but clearly you guys are outpacing market growth and will continue to do so. So just wondering if you feel like the sales force is at a place where you feel like the competitive moat is big enough or do you expect to continue adding there and maybe just talk a little bit about what more needs to be done or if you feel like you've got a big enough competitive moat around you guys today. Thanks so much.
spk02: Sure. Thank you, Danielle. We certainly have what we believe is a competitive advantage with not only the size but the expertise of our sales force, and we expect to continue to add to that sales force, both in the additional sites of care today that we participate in, but as we grow our office strategy, we expect to add additional sales force there. We are looking at specialties within wound care where additional sales representatives would be added. And on the surgical side, we also expect that we'll be adding additional sales force. And as we get further down our pipeline with Transite, which is in the burn space, that would be an additional sales force. Small, it's a pretty efficient market. And ultimately, if successful with Renu, there would be a specialty sales force there. So We expect to continue to add in our traditional markets and continue to add in the adjacencies that we're seeing additional growth from.
spk01: Thanks so much. Sorry for the ignorant questions. I appreciate it.
spk02: Great questions. Thank you, Danielle.
spk00: And as a reminder, ladies and gentlemen, to ask a question, please press star 1 on your telephone keypad. Our next question coming from the line of Stephen Lickman with Oppenheimer. Your line is open.
spk03: Hi, thank you, guys. Gary, you mentioned new product flow in 2022. Can you walk through some of the key products in your focus right now and also maybe specifically on Novocore?
spk02: Sure. So Novocore is one of the products that we'll be launching in the second half. It'll be more of a soft launch and a physician experience kind of a launch. but we do expect it to provide some growth in the second half of the year and be a growth driver for us in years to come. PureApply MZ is the other product that we have. We expect to launch it in the second half of the year. It would not be material, and we don't reflect it in our guidance at all, even though it will be launched. So those are the two products, NovaCorp being more of a contributor this year and PureApply MZ being more of a contributor next year and years to come.
spk03: Got it. Great. And then just secondly, as you look at your advanced wound care guide for the year, what gets you sort of toward the lower end versus the higher end? Is it mostly around COVID? Is it about an oval core ramp? Any sort of color you could provide on sort of, you know, the upper versus lower end?
spk02: Yeah, I'll start, and then, Dave, you can jump in. Clearly, the Omicron and COVID-related issues, we, as I mentioned in our prepared remarks, we're seeing an improved trend in February, and we're seeing improved access. So, you know, that speaks well. But, you know, until we get through the quarter, we won't know exactly what that is. And also, you know, we are relaunching Affinity, and we're relaunching it in the first quarter. We're in You have other seasonal issues as well. So there's a little bit of noise that we want to see a little bit more data before we're comfortable. But that's what the range is for those two items.
spk06: Yeah, I would agree. It's really that dynamic of the extension of what we saw in January further into the full quarter. And obviously we've guided for the full quarter and how the pace of recovery and improvement in the dynamics paces through the year.
spk03: Got it. Great. Thanks, Guy. Thanks, Dave.
spk06: Thanks.
spk00: We are currently showing no remaining questions in the queue at this time. That's the end of our conference for today. Thank you for your participation. You may now disconnect.
spk02: Thank you.
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