Organogenesis Holdings Inc.

Welcome, ladies and gentlemen, to the third quarter 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 risk and uncertainties that could cause actual results to differ materially from those indicated. including the risk and the certainties 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 generally accepted accounting principles or GAAP. We generally refer to these 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. Gilheny Sr.

organogenesis holdings president chief executive officer and chair of the board please go ahead sir thank you operator and welcome everyone to organogenesis holdings third quarter 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'll cover during our prepared remarks I'll begin with an overview of our third quarter revenue results and an update on our key operating and strategic developments in recent months. Dave will then provide you with an in-depth review of our third quarter financial results, our balance sheet and financial condition at quarter end, as well as financial guidance for 2023, which we reintroduced in our press release this afternoon. Then I will share some closing thoughts before we open the call for your questions. Let me start by reviewing our revenue for Q3. We reported net revenue of $108.5 million for the third quarter, down 7% year over year. Sales of our advanced wound care products decreased 7%, and sales of our surgical and sports medicine products decreased 2% compared to the prior year. 2-3 sales reflects the significant business disruption we experienced as a result of the local coverage determinations, or LCDs, published by three Medicare administrative contractors on August 3rd, which we discussed on our second quarter conference call. Specifically, after a strong start to the quarter and despite delivering strong year-over-year growth through August, our sales trends were materially impacted during the month of September. The impact of this business disruption was most acutely experienced in the regions of the U.S. where these MACs operate. Q3 sales in the LCD-impacted MAC regions declined in the high teens year over year, and we experienced a modest decline in the non-LCD-impacted regions, primarily in the office setting. We are proud of the team's execution and commitment to our mission. not just the commercial team in the field, but throughout the organization as these teams work tirelessly following the August 3rd announcement, engaging with all relevant parties in advance of the stated effective date of the LCDs to convince these MACs to withdraw the LCDs and thereby protecting the customers and patients that we serve. As announced on September 28th, all three MACs withdrew the final LCDs for skin substitute grafts, cellular and or tissue-based products, for the treatment of diabetic foot ulcers and venous leg ulcers that was scheduled to take effect on October 1st. We applaud the MACs and CMS for carefully considering the shareholders' and stakeholders' concerns regarding the LCD's potential negative impact in putting the needs of patients first in coming to this decision. We thank all of the stakeholders, including physicians, patient advocacy groups, and clinical and industry associations concerned about the negative health outcomes including prolonged treatment and serious infection, which often leads to amputation and associated higher mortality for their support and advocating for the withdrawal of the LCD. We also thank the stakeholders concerned about the treatment disparity and health inequity impact of the LCD that would have had on the populations with higher rates of diabetes and other comorbidities for their support. Clearly, we are pleased with the withdrawal of the LCD But that said, the overall business disruption in the marketplace, including significant confusion and uncertainty among customers, as well as aggressive in certain circumstances, questionable competitive response, impacted our capacity to engage with new and existing customers, affecting the adoption and utilization of our product, and ultimately affecting our third quarter sales results. While we are pleased with the LCD's withdrawal, we continue to navigate through the challenging environment created by their proposed adoption. We have reintroduced our 2023 financial guidance, which reflects the impact of business disruption in the third quarter, as well as our recovery activities throughout the year. The commercial team is actively re-engaging with our customers to bring our products back to the healing algorithms and formularies. These efforts are progressing well, However, our share of voice has been focused on clarifying the misinformation in the market, limiting our resources on delivering our clinical messaging, and expanding our customer base. 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 portfolio and pipeline, as well as to drive long-term efficiencies, enhance our optionality for the future. We continue to work with outside advisors to identify and evaluate potential options. We are currently targeting a final plan here by the end of calendar year 2023. Our ongoing phase three clinical trial for renew for the treatment of knee osteoarthritis continues to progress as planned. We continue to expect to achieve the last patient last visit milestone by the end of the year, allowing for analysis of the data early next year. We've also made progress with respect to our second phase three study for Renew. We enrolled the first patient in September, as expected, and as previously discussed, we expect to have a subsequent discussion with the FDA regarding the clinical data requirements for the BLA, and we intend to propose the current phase three trial combined with the published 200-patient RCT as valid scientific evidence and sufficient for a BLA approval. With that, let me turn the call over to Dave.

Thanks, Gary. I'll begin with a review of our third quarter financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. As Gary mentioned, net revenue for the third quarter was $108.5 million, down 7%. Our advanced wound care net revenue for the third quarter was $101.4 million, down 7%, and net revenue from surgical and sports medicine products for the third quarter was $7.2 million, down 2%. Gross profit for the third quarter was $82.7 million or approximately 76.2% of net revenue compared to 77.6% last year. The decrease in gross profit and margin resulted primarily from a decrease in pricing for certain of our products as well as a shift in product mix compared to the prior year period. Operating expenses for the third quarter were $74.7 million compared to $88.9 million last year, a decrease of $14.2 million or 16%. The decrease in operating expenses in the third quarter was driven by a 15.1 million or 19% decrease in selling general and administrative expenses, offset partially by a 0.9 million or 9% increase in research and development costs compared to the prior year period. Third quarter gap operating expenses included 0.1 million of restructuring related activities compared to 0.6 million in the prior year, as well as 1.6 million of legal costs and compensation costs related to our efforts to convince the MACs to withdraw the LCDs compared to no such costs in the third quarter of 2022. Third quarter 2022 gap operating expenses also included certain two non-operating items, $4.2 million charge related to disposal of certain equipment related to the construction in progress in one of the company's Canton, Massachusetts facilities, $0.6 million of cancellation fees incurred in connection with the company's decision deposits manufacturing facility construction project. Excluding these items and non-cash intangible amortization of $1.2 million in both periods, non-GAAP operating expenses for the third quarter decreased $10.5 million, or 13%. The material reduction in our non-GAAP operating expenses is related to the time of expenses year over year and a result of our proactive strategy to manage costs in light of the challenging operating environment. We have implemented additional cost reduction initiatives in recent weeks that further mitigate the impact of profitability from the lower fourth quarter revenue outlook. Operating income for the third quarter was $8.1 million compared to $1.8 million last year, an increase of $6.3 million. Total other expenses net for the third quarter was $0.4 million compared to $0.6 million last year, a decrease of $0.2 million. And net income for the third quarter was $3.2 million compared to $0.2 million last year, an increase of $3 million. Adjusted net income for the third quarter was $5.3 million compared to $5.1 million last year, an increase of $0.2 million. As a reminder, adjusted net income is defined as gap net income adjusted to exclude the effect of amortization and restructuring charges and the resulting income taxes on those items. Adjusted EBITDA for the third quarter was $16 million or 14.7% of net revenue compared to 11.6 million or 9.9% of net revenue last year. We believe the operating leverage delivered in the third quarter is notable in light of the year-over-year decline in revenue. We have provided a full reconciliation of our adjusted EBITDA results in our earnings release. Turning to the balance sheet, as of September 30, 2023, the company had $98.8 million in cash, cash equivalents and restricted cash, and $67.6 million in debt obligations, compared to $103.3 million in cash, cash equivalents and restricted cash, and $70.8 million in debt obligations as of December 31, 2022. We have also up to $125 million of available borrowings on a revolving credit facility as of September 30th, 2023. Turning to review of our 2023 financial guidance, which we reintroduced in our press release this afternoon, for the 12 months ending December 31st, 2023, the company now expects net revenue of between $433 million and $446 million, representing a year-over-year decrease in the range of 1% to 4%, 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 $406 million and $418 million, representing a year-over-year decrease in the range of 1% to 4%. Net revenue from surgical and sports medicine products between $27 million and $29 million, representing a year-over-year decrease in the range of flat to down 6%. In terms of profitability guidance for 2023, the company expects to generate gap net income of between $4 and $9 million. and adjusted net income of between $11 million and $17 million. We also expect EBITDA between $26 million and $37 million, and adjusted EBITDA between $40 million and $51 million. In addition to our formal financial guidance for 2023, we're providing some considerations for modeling purposes. For the fiscal year 2023, we now expect the midpoint of our total revenue range for 2023 now assumes sales of PureApply products to decrease approximately 23% year over year and sales of our non-peer-reply products will increase approximately 21% year-over-year. Our profitability guidance now assumes gross margins of approximately 76% to 76.5%. Total GAAP operating expenses will decrease approximately 1% to 2% year-over-year, and total non-GAAP operating expenses will be roughly flat year-over-year. Our 2023 non-GAAP operating expenses include non-cash and tangible amortization of approximately $4.9 million, estimated restructuring charges of $3.4 million, and $1.6 million of other non-operating items related to our efforts to convince the MACs to withdraw the LCDs. Total interest and other expenses of approximately $2.2 million, GAAP tax rate in the range of 51% to 53% at the high end and low end of our guidance range, respectively, and we continue to expect non-GAAP tax rate on adjustments of 27%. We now expect non-cash depreciation of approximately $9.9 million and non-cash stock comp expense of approximately $9 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. With that, I'll turn the call back over to Gary for some closing remarks.