Organogenesis Holdings Inc.

welcome ladies and gentlemen to the fourth quarter and fiscal year 2022 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 report and its subsequently filed 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 applicable securities laws. This call will also include references to certain financial measures that are not calculated in accordance with the generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to be 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. Gilheny, Sr., Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and welcome everyone to Organogenesis Holdings' fourth quarter and fiscal year 2022 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 during our prepared remarks. I will begin with an overview of our fourth quarter revenue results and the update on some of our key operating developments in the recent months. They will then provide you with an in-depth review of our fourth quarter financial results, our balance sheet, and financial condition at year end, and our 2023 financial guidance, which we introduced today with our press release. I'll then share a few thoughts on our outlook for 2023 before opening the call up for questions. So beginning with a review of our revenue for Q4, we reported net revenue of $115.5 million for the fourth quarter, a decrease of 10% year over year, which was driven by a 10% decrease in our sale of advanced wound care products and a 6% decrease in sale of our surgical and sports medicine products. Fourth quarter sales results came in above the low end of the guidance range we provided on our third quarter earnings call. And moreover, sales of both our advanced wound care and surgical sports medicine products exceeded the low end of the range for their respective guidance. That said, the composition of our Q4 revenue by product was different than what we guided. Specifically, the low end of our guidance range assumed a 12% decline in total net sales driven by mid-single-digit growth in sales of pure applied products and nearly a 30% decline in sales of non-pure applied products. As we outlined on our Q3 call, we expected our sales in the physician office setting to be impacted by overall market disruption, driven by reimbursement uncertainty related to CMS publishing ASPs, which can substitute products this year, and competitive pressure from smaller amniotic players. And as expected, we did in fact see a continuation of the challenging operating environment in the physician office in Q4, which was the primary contributor to the 10% decline year over year in sales of non-PureApply products. However, we were pleased that these sales resulted were above the high end of our guidance range. We are proud of the team's execution in Q4 and believe our ability to deliver results in line with our guidance represents another clear illustration that we have the right strategy to maximize our competitive position as a leader in the advanced wound care market. We navigated a challenging operating environment with strong execution by our commercial team, who leveraged a powerful combination of our comprehensive portfolio, our expanding breadth of customers across multiple physician specialties and sites of care, and a well-established brand loyalty. While our net sales declined year over year, there were a number of bright spots in our Q4 results which will help support growth in 2023. Excluding Renew, New Cell, and Dermagraph, our team delivered low double-digit growth in the number of accounts that we serve in both the hospital outpatient setting and the physician office setting compared to the prior period. We delivered double-digit growth in sales of advanced wound care products in the hospital outpatient setting which partially offset the impact of the headwinds that we saw in the office setting, and we're pleased by the encouraging market response to our new product introductions. Turning to an update of our operational progress in recent months, first, we were pleased to announce in a separate press release this afternoon the achievement of an important milestone in notable progress in our ongoing Phase III clinical trial of Renu for the treatment of knee osteoarthritis. Specifically, we completed the interim analysis of 50% of the patients enrolled who had reached the FDA-approved six-month primary efficacy endpoint. This interim analysis of patient safety and effectiveness was reviewed by the Independent Study Data Monitoring Committee, or the DMC, who assessed study performance relative to the primary objectives and statistical power of the study. By way of reminder, the primary efficacy endpoint is a reduction in pain at six months from the start of the study, comparing the renew and control groups. A significant clinical reduction in pain while maintaining or improving patient function is necessary for FDA approval. Based on DMC's review, we were instructed to continue the study as planned. This is a very positive news. And we're encouraged by the results of the DMC's review of the data from the first 50% of the 474 required patients enrolled in the trial, which supports our belief that the results of the original study protocol are on track. This morning's press release also announced that our clinical team delivered on our stated milestone of completing patient enrollment by the end of 2022. And in fact, as a result of the strong momentum in patient enrollment towards the end of the year, we enrolled more than 500 patients in this Phase III clinical study. The team's hard work in activating additional sites and implementing additional recruiting strategies helped accelerate the pace of enrollment over the second half of 22 to get us to this very important clinical milestone. In recent months, we've also made progress with respect to our efforts related to our second Phase III study for renewal. We submitted an IND amendment to the FDA in Q4 of last year and responded to requests for additional information in late February and we expect to hear from the FDA in coming weeks and remain on track with our plan to launch a second phase three study by the end of the second quarter of this year with the first patient enrolled expected to be at the end of the third quarter of this year. As a reminder, Our plan is based on the belief that moving forward as soon as we hear from the FDA will enable us to leverage the major operational advantages of continuing with the current active investigator sites. This plan essentially gives us more options in our regulatory strategy. And as we've discussed previously, we expect to present our strategy in a meeting with the FDA and to propose that the completed 200-patient RCT and the first Phase III study with more than 500 patients together represent valid scientific evidence of renewed safety and effectiveness for the treatment of knee osteoarthritis. In addition to a notable clinical progress in recent months, we've also continued to evaluate potential alternatives after the decision to pause construction of our Canton, Massachusetts manufacturing facility last fall. Recall that this project was put on hold in response to material increases in the expected investment for this facility due to inflation in materials and construction costs in recent years. Specifically, the last estimated project investment represented a 40% increase from the original budget two years ago. While this decision is not expected to impact our ability to meet the market's demand for our existing commercialized products or our ability to achieve our target of greater than 80% gross margins in the future, the building was intended to be used to manufacture multiple products including Dermagraph and Translate, and we remain focused on bringing these products back to the market as soon as possible and expect to have a definitive plan in place by the end of the third quarter of this year. Lastly, I'd like to share a few thoughts on the virtual CMS Skin Substitute Town Hall conducted on January 18th, which I previewed on our Q3 earnings call. The event was organized as an opportunity for interested parties to present and respond to four specific questions related to changes in payment and terminology of skin substitute products under the physician fee schedule. Organogenesis participated and valued the opportunity to share our feedback and responses to CMS's questions during the five minutes allotted to each presenter. And while we applaud CMS for engaging with key constituents during the town hall, We believe a longer discussion of this wide-ranging, complicated, important initiative is warranted. And it's our current understanding that CMS will not be formally engaging with key constituents or providing updates in advance of their annual proposed update to the physician fee schedule in July. However, we plan to continue our vigorous efforts to engage with key constituents, including CMS, on this topic in coming months. With that, let me turn the call over to Dave.

Thank you, Gary. I'll begin with a review of our fourth quarter financial results. And unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net revenue for the fourth quarter of 2022 was $115.5 million, down 10%. Our advanced wound care net revenue for the fourth quarter of 2022 was $108.8 million, down 10%. And lastly, net revenue from surgical and sports medicine products for the fourth quarter of 2022 was $6.7 million, down 6%. with net revenue from Purify products for the fourth quarter of 2022 was $56.8 million, down 9%. Gross profit for the fourth quarter of 2022 was $88.4 million, or approximately 76.5% of net revenue, compared to 74.5% last year. The change in gross margin was driven primarily by changes in product mix and normalized fixed cost absorption as compared to the prior year period, which was impacted by our La Jolla restructuring activities. Operating expenses for the fourth quarter of 2022 were $79.7 million compared to $75.5 million last year, an increase of 4.2 or 6%. The increase in operating expenses in the fourth quarter of 2022 was driven by a $3.1 million or 38% increase in research and development costs and a $1 million or 2% increase in selling general and administrative expenses compared to the prior year period. Fourth quarter 2022 GAAP operating expenses include certain non-operating items totaling $0.8 million consisting of employee retention and benefits as well as other exit costs associated with the company's restructuring activities. This compares to $1.8 million of restructuring related charges in the prior year. Excluding these non-operating items and non-cash intangible amortization of $1.2 million in both periods, non-GAAP operating expenses for the fourth quarter of 2022 increased 7% year-over-year, driven by higher clinical study-related spending in support of our renewed studies and mid-single-digit growth in SG&A expenses. Note we have a detailed reconciliation of these non-operating and non-cash items in today's earnings press release. Our non-GAAP operating expenses for growth in 2022 reflects our strategy to prioritize investments in areas that enhance our foundation for future growth. Specifically, of the roughly 37 million increase in non-GAAP OPEX in 2022, roughly 70% was invested in sales and marketing, R&D, and clinical initiatives, including expanding our commercial team, supporting new product development, and funding clinical studies. The balance of the increase in non-GAAP operating expenses this year was largely focused on continuing to enhance infrastructure to support our growth objectives going forward. Operating income for the fourth quarter of 2022 was $8.7 million compared to operating income of $19.8 million last year, a decrease of $11 million. Total other expense for the fourth quarter of 2022 was zero in the fourth quarter of 2022 compared to $0.9 million last year, a decrease of $0.9 million. The change in total other expense was primarily related to a $0.5 million gain on capitalized interest related to our decision to pause the Canton Manufacturing Project. The remaining year-over-year decline and total other expense for the fourth quarter of 2022 is attributable to lower interest expense on outstanding borrowings. Net income for the fourth quarter of 2022 was $7.5 million compared to $51 million last year, a decrease of $43.5 million. As a reminder, net income for the fourth quarter of 2021 included a benefit of $32 million in income taxes recognized resulting from the release of the valuation allowance previously recorded against the full amount of our net U.S. deferred tax assets. Adjusted EBITDA for the fourth quarter of 2022 was $14.1 million, or 12% of net revenue, compared to $26.3 million, or 21% of net revenue last year. We provided a full reconciliation of our adjusted EBITDA results in our earnings press release. Turning now to the balance sheet, as of December 31, 2022, the company had $103.3 million in cash and cash equivalents, and restricted cash and $70.8 million in debt obligations. This compared to $114.5 million in cash, cash equivalents and restricted cash and $73.6 million in debt obligations of which $0.2 million were finance lease obligations as of December 31st, 2021. We also have up to $125 million of available borrowings on our revolving credit facility as of December 31st, 2022. Turning now to a review of our 2023 financial guidance, which we introduced in our press release this afternoon, for the 12 months ending December 31st, 2023, the company expects net revenue between $450 million and $462 million, representing a year-over-year change in the range of flat to an increase of approximately 2% as compared to net revenue of $450.9 million for the year ended December 31st, 2022. The 2023 net revenue guidance range assumes net revenue from advanced wound care products of between $420 million and $428 million, representing a year-over-change of down 1% to up 1%, as compared to net revenue of $422.2 million for the year ended December 31, 2022. Net revenue from surgical and sports medicine products between $30 million and $34 million, representing an increase of 5% to 19% year-over-year, as compared to net revenue of $28.7 million for the year ended December 31st, 2022. And net revenue from the sale of our Pure Apply products of between $180 million and $200 million, representing a decrease of approximately 26% to 18% year-over-year, as compared to net revenue of $242.7 million for the year ended December 31st, 2022. In terms of our profitability guidance for 2022, the company expects to generate GAAP net income between $7.2 and $13.9 million, adjusted net income between $12.3 and $19 million, EBITDA between $27 million and $36.1 million, and adjusted EBITDA between $36.5 million and $46 million. In addition to our formal financial guidance for 2023, we are providing some considerations for modeling purposes. For the fiscal year 2023, we expect sales of our non-peer-replied products which include our amniotic, PMA, and other products, will increase at the midpoint of the range of approximately 28% year-over-year in 2023. Gross margins of approximately 75.7% to 76.5%. Total GAAP operating expenses will increase 1% to 2% year-over-year. And total non-GAAP operating expenses will increase approximately 2% and 3%, respectively, year-over-year. Our 2023 non-GAAP operating expenses include non-cash intangible amortization of approximately $4.9 million and estimated restructuring charges of $2.1 million. Total interest and other expenses of approximately $5.2 million compared to $2 million last year and non-GAAP tax rates of approximately 29% and 27% respectively. Non-cash depreciation of $6.4 million and non-cash stock comp expense of approximately $7.8 million and weighted average diluted shares of approximately $133 million. We also expect full year 2023 CapEx to be approximately $25 million to $30 million. And finally, I'd like to remind investors that our business experiences significant quarterly seasonality each year, with Q1 and Q4 representing our smallest and largest revenue quarters, respectively. Over the last five years, our first quarter revenues have ranged between approximately 18% to 22% of annual revenue. For 2023, we expect the first quarter revenue in the range of approximately $95 million to $100 million, or 21 to 22% of our full year 2023 net revenue. With that, I'll turn the call back over to Gary for some closing remarks.