Organogenesis Holdings Inc.

Ladies and gentlemen, to the third quarter of fiscal year 2024 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 commitments 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 include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these 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 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 review an overview of our third quarter revenue results in 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 our financial guidance for 2024, which we updated in our press release this afternoon. I'll then share some closing thoughts before we open the call up for questions. Beginning with the review of our revenue results for Q3, we delivered sales results above the high end of the guidance range outlined on our second quarter call. Our team's strong execution resulted in better than expected productivity despite continued disruption in the marketplace. Our third quarter results reflect improving momentum in the underlying business trends, and we were pleased to see customer demand in excess of what our guidance had assumed during the third quarter. We believe the better than expected revenue results we have delivered in each of the first three quarters of 2024 represent the clearest evidence that we have focused our commercial team on the right strategies to navigate through this challenging operating environment. Turning to review of our progress towards key strategic initiatives in the third quarter. On August 8th, we announced the additional clinical results from our first phase three clinical trial, a prospective double-blinded multicenter saline control, parallel group clinical trial of 515 patients. The 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. We've also made important progress on our second phase three multi-centered randomized clinical trial evaluating the safety and efficacy of Renu during the third quarter. We completed enrollment of 594 patients well ahead of our original timing expectations, and notably we enrolled 120 more patients than the 474 required by the study. As announced in a separate press release, we received a favorable outcome of the pre-specified interim analysis for the first 50% of the required patients in our second phase three trial. The Independent Data Monitoring Committee, or DMC, for the trial provided directional guidance on the results of the interim analysis while rigorously maintaining all aspects of study blinding. The DMC recommended that the trial proceed without modification and without increase to sample size. Additionally, the DMC found the safety data to be consistent with the known safety profile for Renew. We continue to believe that if approved, introducing Renu to the large and growing pain management market represents a transformational opportunity for organogenesis. We believe Renu, if approved, will potentially address an unmet clinical need for all patients suffering from symptomatic neoA, a degenerative joint disease that affects more than 30 million Americans. We have a clear roadmap and timeline for our Renu BLA submission. and we are on track to deliver the Renu BLA submission by the end of Q4 2025. If successful, Renu would be the only FDA-approved biologic intra-articular injection to improve pain symptoms related to symptomatic knee OA. 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. On October 1st, we announced the publication of results from a robust 218-patient study of NuShield in the Journal of Wound Care. NuShield demonstrated statistically superior frequency of wound closure compared to the standard of care at five intervals from four weeks to 12 weeks. A total of 218 patients with challenging DFUs were randomized into two treatment groups NuShield plus standard of care or standard of care alone. The NuShield group demonstrated a 48% greater probability of wound closure and decreased medium time to complete wound closure when compared to standard of care. We are pleased this data demonstrates NuShield provides a significant advantage when managing DFUs, a severe medical crisis that often leads to amputation and associated higher mortality rates, especially in underserved populations. As outlined on our latest earnings call, our comment letter to the MACs included this high-quality published data and evidence evaluating NuShield for the treatment of DFU that was not considered in the draft LCD, which we believe demonstrates that NuShield meets all the criteria for coverage. As a leader in this field, we support CMS's evidence-based approach to coverage for these serious wounds and believe this large peer-reviewed publication satisfies the requirements for medical coverage under the proposed LCD. Our comment letter also included existing clinical and real-world data supporting our case that Pure Apply AM and XT meet the requirements for Medicare coverage as well. This data includes a high-quality published data from 728 patients supporting coverage for Pure Apply AM and XT for the treatment of DFU and VLUs and a comparative effectiveness study of 294 patients published in May of 2024 after the literature review for the draft LCD was completed, which shows non-inferiority to TheraSkin, a product the draft LCD proposed to cover. We also made progress in expanding our clinical validation for PurePly in the third quarter. In August, we enrolled the first patient in our new RCT, the PREPARE study, evaluating the pure apply AM plus standard of care versus standard of care alone in 170 patients with chronic DFUs. On November 1st, CMS issued the final rules for the Medicare physician fee schedule and the hospital outpatient department. CMS has not proposed any changes to the payment policies for skin substitutes in either setting, and the final rule maintains the status quo. In the physician fees schedule final rule, there were no changes in payment policy for skin substitutes for 2025. CMS reiterated that its goal is to achieve a consistent payment approach for skin substitute products that does not negatively impact beneficiary access. CMS also noted that it intends to bridge the gap in variations of pricing for these products through the establishment of consistent framework for payment of skin substitutes under the physician fee schedule in future rulemaking. CMS does not say more about what that framework might look like or the timing of any future changes. Now, we have communicated to CMS that they should transition to a value-based payment methodology where skin substitute categories are paid on a fixed per square centimeter basis. This value-based payment methodology has the potential to substantially reduce Medicare Part B expenditures, improve patient access, and enable physicians to prescribe treatments that are based on the individual needs of the patients and provide the best outcome for patients and the healthcare system. While there was no change in payment policy for skin substitutes in the final rule for 2025, we were pleased to see the final rule included commentary from CMS recognizing the benefit of continued dialogue with interested parties on payment for skin substitute products to help inform policy changes but future rulemaking. As a leader in the market, we have been and will continue to actively engage with CMS to advocate for the requisite changes to the payment systems. We appreciate CMS's willingness to consider our framework and our feedback, and we are particularly pleased in the acknowledgement of the need to establish a framework for consistent payment for skin substitute products under the physician fee schedule that does not negatively impact beneficiary access. We applaud the MACs for continuing to prioritize coverage with demonstrated clinical efficacy for skin substitute products. We have been pushing for reform for many years and believe that this proposed LCD represents a substantial step forward towards cleaning up the marketplace. Importantly, given our leadership position in the space, we remain vocal and active in support of the immediate need for reform. In addition to our direct efforts with CMS and the MACS, we are engaging with stakeholders, including physicians, patient advocacy groups, and clinical and industry associations, and we are leading primary health policy education initiatives directed to 59 congressional offices. We want to ensure all parties are as well informed as possible and that they are carefully considering the impacts of potential changes to the coverage of skin substitutes for the treatment of DFUs and VLUs, including the potential treatment disparity in health inequity impact on populations with higher rates of diabetes and comorbidity. We continue to believe these material changes from the MACs and CMS in the coverage and payment of skin substitutes, if ultimately adopted, will be positive for the long-term health of the wound care market and its patients, Well, there'll be a preliminary period of transition and disruption if these sweeping changes are implemented. We believe organogenesis is strong brand equity, established commercial infrastructure, and our plan to establish additional clinical validation to secure coverage of key commercialized products taken together represent a substantial competitive advantage for us that has us well-positioned to maximize the enormous opportunity to serve more patients with our highly innovative and highly efficacious products. 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. Net revenue for the third quarter was $115.2 million, up 6%. As Gary mentioned, these results were ahead of the expectations we provided on our Q2 call, which called for total second quarter revenue in a range of $105 million to $113 million, reflecting continued strong momentum in the business during the third quarter. Our advanced wound care net revenue for the third quarter was $108 million, up 7%, and net revenue from surgical and sports medicine products for the third quarter was $7 million, up 1%. Gross profit for the third quarter was $88 million, or 76.7% of net revenue, compared to 76.2% last year. Operating expenses for the third quarter were $82.1 million compared to $74.7 million last year, an increase of $7.4 million or 10%. The year-over-year change in operating expenses was driven by a $7.6 million or 12% increase in selling general and administrative expenses compared to the prior year period. Research and development expenses declined 1% year-over-year and declined 34% sequentially, the latter of which was due to the timing of expenses associated with clinical research and trials. Operating income for the third quarter was $6.2 million compared to operating income of $8.1 million last year, a decrease of $1.8 million or 22%. Net income for the third quarter was $12.3 million compared to net income of $13.2 million last year, an increase of $9.2 million. Adjusted net income for the third quarter was $12.9 million compared to $5.3 million last year. The largest contributor to the year-over-year increase in net income and adjusted net income was a change in income tax. We had a benefit of $6. in the third quarter of 2024, compared to an expense of $4.5 million last year. The change in income tax year-over-year was driven primarily by R&D tax credit incentives, partially offset by tax adjustments related to executive compensation and other non-defectible expenses. Adjusted EBITDA for the third quarter was $13.4 million, or 12% of net revenue, compared to $16 million, or 14.7% of net revenue last year. We provided a full reconciliation of our adjusted net income and adjusted EBITDA results in our earnings release. Turning to the balance sheet, as of September 30th, 2024, the company had $94.9 million in cash, cash equivalents, and restricted cash, and $62.1 million in net debt obligations, compared to $104.3 million in cash, cash equivalents, and restricted cash, and $66.2 million in net debt obligations as of December 31st, 2023. We also have up to 125 million of available borrowings on our revolving credit facility as of September 30th, 2024. As announced in a separate press release this afternoon, we completed the closing of a private placement of Series A convertible preferred stock to Avista Healthcare Partners with gross proceeds to the company of $100 million prior to deduction of fees and expenses. The company intends to use these net proceeds from the closing of the private placement to fund strategic growth initiatives including but not limited to operating and commercial activities, clinical development programs, working capital, capital expenditures, and for general corporate purposes. This transaction substantially enhances our balance sheet and financial condition with important capital to execute our long-term growth strategies and to provide us cash to serve as remaining principal owed at the maturity of our term loan facility in mid-2026. We appreciate the support from leading healthcare investor and believe it reflects Avista's confidence in the compelling opportunity investing in organogenesis presents. Turning to a review of our 2024 financial guidance, we are updating revenue guidance to reflect the better than expected results in the third quarter. Our revenue guidance continues to reflect the potential near-term disruption in the fourth quarter in the market that we expect from the LCDs. Note our guidance continues to reflect the expectation that the final ruling from the MACs will be announced in the fourth quarter with an effective date of January 1, 2025. For the 12 months ending December 31, 2024, the company now expects net revenue between $455 million and $480 million, representing a year-over-year increase in the range of 5% to 11% as it compared to net revenue of $433.1 million for the year ended December 31, 2023. The 2024 net revenue guidance range assumes net revenue from advanced wound care products between $429 million and $452 million, representing a year-over-year increase in the range of 6% to 11%. And net revenue from surgical and sports medicine products between $26 million and $28 million, representing a year-over-year change in the range of a decline of 6% to an increase of 1%. We have updated our gap profitability and EBITDA guidance as well. Specifically, we now expect net loss in the range of 12.3 million to 0.6 million compared to a range of GAAP net loss of 27 million to a GAAP net loss of 12 million previously. We now expect EBITDA in the range of a loss of 1.3 million to positive EBITDA of 14.4 million compared to an EBITDA range of a loss of 17 million to positive EBITDA of 2 million previously. We now expect non-GAAP adjusted income in the range of 6.7 million to 18.4 million compared to a range of non-GAAP-adjusted net loss of $8 million to non-GAAP-adjusted net income of $7 million previously. And we now expect adjusted EBITDA in the range of $31.7 million to $47.4 million, compared to adjusted EBITDA in the range of $16 to $35 million previously. With that, I'll turn the call back to Gary for some closing remarks.