Organogenesis Holdings Inc.

Please stand by. Welcome ladies and gentlemen to the second quarter of fiscal year 2023 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 violence 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 contain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to those 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 in the investor relations portion of our website. I would now like to turn the call over to Mr. Gary S. Gilhaney, Senior Organizations Holdings President and Chief Executive Officer. Sir, please go ahead.

Thank you, Operator, and welcome everyone to OrganiGenesis Holdings' second quarter of fiscal year 2023 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 during our prepared remarks. I'll begin with an overview of our second quarter revenue results and an update on our key operating developments in recent months. Dave will then provide you with an in-depth review of our second quarter financial results, our balance sheet, and financial condition at quarter end. I will then discuss our initial thoughts on the recent local coverage determinations, or LCDs, the related uncertainty regarding our 2023 revenue and profitability outlook, and the steps we are taking to address the reclassification of our products that will be impacted if these LCDs remain unchanged and go effective in September. Then we will open up the call for your questions. Beginning with the revenue for the second quarter, we reported net revenue of $117.3 million for the second quarter, which came in above the high end of the range of the guidance that we provided on our first quarter earnings call, driven by sales of our advanced wound care products at the high end of our expectations and the sales of our surgical and sports medicine products exceeding the high end of our expectations in Q2. Second quarter total net revenue decreased 3% year over year, which was driven by a 3% decrease in the sales of our advanced wound care products and a 5% decrease in sales of our surgical and sports medicine products. Advanced wound care product sales were driven by better than expected demand for our non-PureApply products in the second quarter, with sales of our well-established, highly differentiated PureApply brand being right in line with our expectations for the period. Importantly, our advanced wound care product sales results exceeded our expectations in a hospital outpatient setting and were in line with our expectations in the physician office in Q2. As expected, we leveraged our diversified portfolio and leadership position in wound care centers and physician offices across the U.S. to increase the number of accounts served in both the hospital outpatient setting and the physician office setting. Additionally, we delivered mid-single-digit growth in units sold year-over-year in Q2, driven by double-digit growth in the hospital outpatient setting. We are proud of the team's execution in Q2 and believe we are navigating the dynamic marketplace effectively. And as discussed, we expected a transitory impact on our growth and sales of advanced wound care products in 2023, driven primarily by the impact of key products in the physician office setting working through their nationwide launches and recently published ASPs. And to date, we are pleased that these national launches have performed better than expected. This gives us further confidence that we have the right strategy to maximize our competitive position as a leader in the advanced wound care market and remain well positioned in the coming years. Turning to an update on our operational progress in recent months. We continue to focus on and invest in expanding manufacturing capacity overall for our product portfolio and pipeline, and specifically for developing manufacturing capability for our Dermagraph and Transite products that were previously manufactured in California. By way of reminder, we are working with development firms to assess building additional manufacturing space at our Massachusetts headquarters and in parallel are looking for alternatives for existing manufacturing space within the region. As previously communicated, we expect to have a definitive plan by the end of the third quarter. Our ongoing phase three clinical trial of Renu for the treatment of knee osteoarthritis continues to progress as planned. The efficacy phase of the trial was completed in July, and we continue to expect to achieve the last patient, last visit milestone and complete the trial by the end of the year. We've also made progress with respect to the second Phase III study for Renew. We have received FDA approval for the protocol and to proceed with the second Phase III trial. This will be a 474-subject trial with a design similar to the first Phase III trial. Major startup activities are well underway with our current contract research organization and other study operations vendors, and we remain on track for first patient enrollment by the end of the third quarter. We received positive response from the FDA in a Type B meeting regarding questions we asked relating to the CMC aspects of the Renu product, including confirmation of the testing approach and the manufacturing of Renu. As previously discussed, we expect to have a subsequent discussion with FDA regarding the clinical data requirements for the BLA, and we intend to propose the current Phase III trial combined with the published 200-patient RCT as valid scientific evidence and sufficient for a BLA approval. As a reminder, our plan is based on our belief that moving forward with a second trial as soon as we hear from the FDA will enable us to leverage the major operational advantages of continuing with the current active investigators. This essentially gives us more options in our regulatory strategy. Lastly, I'd like to share a few thoughts on the proposed physician fee schedule for calendar year 2024 that was published in July. We are pleased that the Centers for Medicaid and Medicare Services has acknowledged the concerns raised by stakeholders in the town hall meetings in January of 2023 and is seeking additional input from stakeholders before making any changes to the payment policies for skin substitutes. As we have urged on many occasions, CMS should pay for all skin substitutes using the ASP methodology. Manufacturers are already required to provide ASP pricing information, and as the Office of the Inspector General made clear in its March 2023 report, transitioning all skin substitute to ASP pricing has the potential to substantially reduce Part B expenditures. We also believe that transitioning skin substitutes to ASP-based payments would improve patient access, enable physicians to prescribe treatment options based on the individual needs of the patient, and provide the best outcomes for patients and the healthcare system. With that, let me turn the call over to Dave.

Thank you, Gary. I'll begin with a review of our second quarter financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net revenue for the second quarter was $117.3 million, down 3%. Our advanced wound care net revenue for the second quarter was $110.1 million, down 3%. And net revenue from surgical and sports medicine products for the second quarter was $7.2 million, down 5%. Gross profit for the second quarter was $91 million, or approximately 77.6% of net revenue, compared to 78% last year. The change in gross margin was driven primarily by lower sales volume compared to the prior year period. Operating expenses for the second quarter were $81.3 million compared to $82.8 million last year, a decrease of $1.6 million or 2%. The decrease in operating expenses in the second quarter was driven by a $2.3 million or 3% decrease in selling, general, and administrative expenses, offset partially by a $0.7 million or 7% increase in research and development costs compared to the prior year period. Second quarter gap operating expenses included a modest reversal of non-operating items consisting of employee severance and benefits, as well as other exit costs associated with certain restructuring activities. This compares to $0.6 million of restructuring related charges in the prior year. Excluding restructuring items and non-cash intangible amortization of $1.2 million in both periods, non-gap operating expenses for the second quarter decreased 0.8 million, or 1% year-over-year, driven by strong cost management pursuant to our strategy to prioritize investments in areas that enhance our foundation for future growth, including higher clinical study-related spending in support of our renewed studies. Note we have a detailed reconciliation of these non-operating and non-cash items in today's earnings press release. Operating income for the second quarter was $9.7 million compared to $11.9 million last year, a decrease of $2.2 million. Total other expenses net for the second quarter were $0.6 million compared to $0.8 million last year, or a decrease of $0.2 million. Net income for the second quarter was $5.3 million compared to $8.7 million last year, a decrease of $3.4 million. Adjusted net income in the second quarter was $6.1 million compared to $11.3 million last year, a decrease of $5.2 million. And as a reminder, adjusted net income is defined as GAAP net income adjusted to exclude the effect of amortization restructuring charges, GPO settlement fees, and resulting income taxes on these items. Adjusted EBITDA for the second quarter was $15.4 million, or 13.1% of net revenue, compared to $18.6 million, or 15.3% of net revenue last year. We have provided a full reconciliation of our adjusted EBITDA results in our earnings press release. Turning to the balance sheet, as of June 30, 2023, the company had $89.5 million in cash and cash equivalents, and restricted cash and $69 million in debt obligations compared to $103.3 million in cash equivalents and restricted cash and $70.8 million in debt obligations as of December 31st, 2022. We also have up to $125 million of available borrowings on the revolving credit facility as of June 30th, 2023. With that, I'll turn the call back over to Gary for some closing remarks.