Organogenesis Holdings Inc.

Welcome ladies and gentlemen to the second quarter 2024 earnings conference call for Organogenesis Holdings Inc. At this time, all participants are 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 ACWA results to differ materially from those indicated, including the risk 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 speaks 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 security laws. This call will also include reference 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. Reconciliation of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with the 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. Gilhaney, Senior Organogenesis Holdings President, Chief Executive Officer, and Chair of the Board. Please go ahead, sir.

Thank you, Operator, and welcome everyone to Organogenesis Holdings' second quarter of fiscal year 2024 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 second 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 second quarter financial results, our balance sheet and financial condition at quarter end, as well as our financial guidance for 2024, which we updated in our press release this afternoon. Then I'll share some closing thoughts before we open the call out for your questions. Beginning with the review of our revenue results for Q2, our sales results came in above the high end of the guidance range outlined on our first quarter call, reflecting strong execution and a continuation of the positive momentum and business trends in the first half of 2024. Our team's strong execution resulted in better than expected productivity by enhancing existing customer relationships, regaining lost accounts, and capturing new accounts. And despite disruption in the marketplace fueled by continued aggressive pricing strategies and, in certain circumstances, questionable competitive activities, we believe our second quarter results support our continued confidence that we focused our commercial team on the right strategy to navigate through this challenging operating environment. We are encouraged by the further evidence that our team is driving growth in our customer base by emphasizing our differentiated product and their clinical validation. In addition to the strong commercial momentum in Q2, we were pleased to share updates on the substantial progress we have made on our Renew program in recent months. As announced in a separate press release this afternoon, where we announced additional clinical results from our first phase three trial, a prospective double-blinded, multi-center, saline-controlled, parallel group clinical trial of 515 patients. The Phase III RCT results met the expectations for the study by meeting the primary endpoint of a statistically significant reduction in knee pain and the first secondary endpoint of statistically significant maintenance of function at six months. The statistical power of this study was based on these key efficacy points meeting the predefined requirements supporting a BLA submission. We completed additional subgroup analysis which revealed that the most severe patients known as KL4s treated with Renu responded with similar reduction in pain to those patients with moderate disease, the KL3 group, which is consistent with the top line results. These results are notable given that up to 15% of knee OA patients are classified as severe And the end-stage management of this disease in these patients is typically a total knee replacement when all other treatment options are exhausted. By way of reminder, 30% of the enrolled patients in the first Phase III trial were KL4s. And if successful, Renu would be the only FDA-approved biologic intraarticular injection to improve pain symptoms even in the most severe case of knee OA. Other sensitivity analysis found that subjects in the saline group took substantially more acetaminophen for breakthrough pain during the study, while subjects in the renewed group took less acetaminophen for breakthrough pain. This result further supports the improved outcomes in WOMAC pain seen at six months. During the second quarter, we requested a Type B meeting with the FDA to discuss the clinical data requirements for a biologic license application filing pursuant to the strategy we outlined on our recent earning calls. We completed the Type B meeting with the FDA on July 25th, and the FDA confirmed that a confirmatory trial will be required to support a BLA submission. We received positive feedback and guidance on our Chemistry Manufacturing and Controls, or CMCs, and the agencies affirmed the company's proposed analytical assay strategy and framework for process validations. We were also pleased to announce that we completed enrollment in the second phase three multi-centered randomized control trial, evaluating the safety and efficacy of Renu with 594 patients, significantly outperforming enrollment expectations and well ahead of our original expectations when we started enrolling this study last September. Following the positive type B meeting with the FDA, we now have a clear roadmap and timeline for our renewed BLA submission, and we are on track to deliver the renewed BLA submission by the end of Q4 2025. We continue to believe that if approved, introducing Renu to a large and growing pain management market represents a transformational opportunity for organogenesis. And if approved, introducing Renu as an innovative pain management solution for the millions of patients suffering from EOA represents a significant new addressable market opportunity for organogenesis. Specifically, by 2027, an estimated 34.4 million Americans are expected to be affected by knee osteoarthritis. While there is no known treatment that completely cures knee OA, it is possible to treat the disease symptoms with the goal of avoiding or delaying costly and invasive knee replacement surgery. We believe Renew, if approved, will address an unmet clinical need for all patients suffering from moderate to severe symptomatic knee osteoarthritis. And we are particularly excited by the unique opportunity for Renu to serve the most severe knee OA patients who have limited non-surgical options representing an estimated 5 million Americans. Before turning the call over to Dave, I wanted to share a brief update on our recent progress in the areas of clinical validation and Medicare reimbursement and coverage. Pursuant to the strategy discussed in our last earnings call, we submitted our comment letter to the MACs in advance of the deadline in early June, reiterating our support for the MACs' evidence-based approach reflected in the draft LCDs. As planned, our comment letter included the following existing clinical and real-world data, including RCTs, in support of our case that NuShield, PureApply AM, and PureApply XT should be included on the covered list. For NuShield, a high-quality published data and evidence including a recently published peer-reviewed RCT with 218 patients evaluating NuShield for the treatment of DFUs that was not considered in the draft LCDs, which we believe demonstrates that NuShield meets all the criteria for coverage. The results of this RCT were published on June 6th in the Journal of Wound Care and includes compelling, statistically significant data from this large and rigorously designed prospective Level 1 RCT, evaluating the effectiveness of NuShield for the treatment of complex DFUs in a challenging patient population. For PureApply AM and XT, currently available high-quality published data from a 728-patient study supporting the coverage of PureApply AM and XT for the treatment of DFUs and VLUs. We highlighted that PureFly AM is supported by a large body of data across five peer-reviewed publications showing effectiveness in treating DFUs, BLUs, and pressure injuries in a complex comorbid population. This data included a comparative effectiveness study of 294 patients published in May of 2024, after the literature review for the draft LCDs was completed. which showed a non-inferiority to Theraskin, a product the draft LCD proposed to cover. We are making solid progress towards new RCTs, evaluating the use of PureApply AM for DFUs that we discussed in our last earnings call. We received IRB approval, have identified sites that are targeting first patient enrollment in the coming weeks. We will continue our efforts to build compelling cases to present to the MACs to secure coverage for additional products later this year and into next year. We continue to believe these material changes from CMS and the MACs in the reimbursement of skin substitutes, if ultimately adopted, will be positive for the long-term health of the wound care market. While there will be a period of transition and disruption if these sweeping changes are implemented, we believe that organogenesis is strong brand equity, established commercial infrastructure, and plan to establish additional clinical validation to secure coverage of key commercialized products, which taken together represent a substantial competitive advantage for us that has us well positioned to maximize the enormous opportunity to serve more patients in our highly innovative and efficacious products. With that, let me turn the call over to Dave.

Thanks, Gary. I'll begin with a review of our second quarter financial results. And unless otherwise specified, all growth rates referenced during my prepared remarks or on a year-over-year basis. Net revenue for the second quarter was $130.2 million, up 11%. As Gary mentioned, these results were ahead of expectations we provided in our Q1 call, which called for total second quarter revenue in the range of $120 million to $125 million, reflecting continued strong momentum in the business during the second quarter. Our advanced wound care net revenue for the second quarter was $123.2 million, up 12%. and net revenue from surgical and sports medicine products for the second quarter was $7 million, down 3%. Gross profit for the second quarter was $101 million, or 77.6% of net revenue, compared to 77.6% last year. Operating expenses for the second quarter were $114.9 million, compared to $81.3 million last year, an increase of $33.7 million, or 41%. Note that second quarter operating expenses included approximately $22.8 million of non-cash impairment of building and unfinished construction improvement work previously capitalized, as well as the write-down of costs related to the development of internal use software. Excluding the aforementioned non-cash charges and approximately $0.8 million of non-cash amortization expense, our second quarter operating expenses increased $11.3 million, or 14%. The year-over-year change in operating expenses included excluding these non-cash items was driven by a $6.6 million or 10% increase in selling general and administrative expenses and a $4.6 million or 43% increase in research and development costs compared to the prior year period. The increase in research and development expenses was primarily due to expenses associated with clinical research and trials primarily related to renew and support of our BLA efforts. Operating loss for the second quarter was $13.9 million compared to operating income of $9.7 million last year, a decrease of $23.6 million. Excluding non-cash impairment charges, write-downs, restructuring, and amortization expenses in both periods, our non-GAAP operating income was $9.7 million, or 7.5% of sales, compared to $10.8 million, or 9.2% of sales last year. Net loss for the second quarter was $17 million compared to net income of $5.3 million last year, a decrease of $22.4 million. Adjusted net income for the second quarter was $0.2 million compared to $6.1 million last year, a decrease in adjusted net loss of $5.9 million. As a reminder, adjusted net income is defined as gap net income, adjusted to exclude the effect of amortization, restructuring charges, write-downs, capitalized software costs, and impairment of building and improvements, and resulting income taxes on these items. Adjusted EBITDA for the second quarter was 15.6 million or 12% of net revenue compared to 15.4 million or 13% of net revenue last year. We've provided a full reconciliation of our adjusted net income and adjusted EBITDA results in our earnings press release. Turning out of the balance sheet, as of June 30th, 2024, the company had 90.5 million in cash, cash flows and restricted cash and 63.5 million in debt obligations, compared to 104.3 million in cash, cash equivalents and restricted cash, and 66.2 million in debt obligations as of December 31st, 2023. We also have up to 125 million of available borrowings on a revolving credit facility as of June 30th, 2024. Turning to a review of our 2024 financial guidance, despite the strong continued momentum that we are experiencing in the business, We are reaffirming our prior revenue guidance that we referenced in our press release this afternoon to account for the potential near-term disruption in the market that we expect from the LCDs. For the 12 months ending December 31, 2024, the company continues to expect net revenue of between $445 million and $470 million, representing a year-over-year increase in the range of 3% to 9% as it compared to net revenue of $433.1 million for the year ended December 31, 2023. The 2024 net revenue guidance assumes net revenue from advanced wound care products of between $415 million and $435 million, representing a year-over-year increase in the range of 2% to 7%, and net revenue from surgical and sports medicine products between $30 million and $35 million, representing a year-over-year increase in the range of 9% to 27%. For modeling purposes, we expect third-quarter revenue to be in the range of approximately $105 million to $113 million. We have updated our GAAP profitability and EBITDA guidance for 2024 to reflect the $22.8 million of non-cash impairment charges and write-down costs and related tax impacts on these items recognized in the second quarter. Specifically, we now expect GAAP net loss in the range of $27 million net loss to a $12 million net loss compared to a range of GAAP net loss of $10.6 million to a GAAP net income of $4.6 million previously We also expect EBITDA in the range of a net loss of $17 million to positive EBITDA of $2 million compared to a range of EBITDA generation of $5.8 million to $25 million previously. Our adjusted net income loss guidance remains unchanged. Specifically, we continue to expect adjusted net income loss in the range of $8 million to adjusted net income of $7 million and adjusted EBITDA in the range of $16 million to $35 million. All other non-GAAP modeling considerations outlined in our fourth quarter 2023 call remain largely unchanged. With that, I'll turn the call back over to Gary for some closing remarks. Thanks, Dave.