Q3 2020 Organogenesis Holdings Inc Earnings Call
Ladies and gentlemen, please standby your organogenesis holdings Inc. third quarter.
2020 earnings conference call begin momentarily. Thank you for your.
Patient simply standby.
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Please standby good afternoon, ladies and gentlemen, and welcome to the third quarter 2020 earnings Conference call for Organogenesis Holdings, Inc.
This time all participants have been placed it was an Oh. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly.
And I would like to remind everyone that our works 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 risks and uncertainties described in the Companys filings with the Securities and Exchange Commission, including item one.
The company's most recent annual and quarterly reports.
Not to sleep undue reliance upon any forward looking statements, which speak only as of the date made although they voluntarily do so from time.
Your time the company undertakes no commitment to revise.
Forward looking statements, whether as a result of new information future events or otherwise, except as required by federal.
<unk> security laws.
This call was a good run rate just to certain financial measures that are not calculated in accordance with generally accepted accounting principles for GAAP, we generally refer to these as non-GAAP financial measures.
So each will be non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP or available in the earnings press release on the Investor Relations portion of our website.
I would now like turn the call over to Mr., Gary S. Gill Guinea, Senior Organogenesis Holdings, President and Chief Executive Officer, Sir. Please go ahead Sir.
Thank you.
Welcome everyone to well Ganoe Genesis Holdings third.
Order 2020 earnings conference call.
I'm joined today on the call by Henry <unk>, our interim Chief Financial Officer.
Well, let me start with a brief agenda or what will cover in our prepared remarks today.
I'll start with an overview of our revenue performance in the third quarter, including the improving business trends, we experienced during the quarter in the areas of our business performed extremely well despite the challenging operating environment.
After my opening remarks, Henry will provide you with a more in depth review of our quarterly financial results.
And the formal financial guidance. We included in this afternoons press release as well as a summary of our balance sheet and financial condition.
Then we'll open it up for questions.
Let me begin with the review of our third quarter revenue performance.
We reported total revenue growth of 57% year over year in the third quarter, driven by 66% growth in our advanced wound care products and 9% growth in Austin.
Surgical and sports medicine products compared to the prior year.
Our revenue results were well above expectations and exceeded the high end of our preliminary revenue range announced on October 14th.
Our growth in Q3 reflects a continuation of the key drivers of our growth strategy and competitive advantages that we've been talking about on each of our earnings call. This year.
The investments we've made to expand our sales force in recent years.
The benefits of our comprehensive and differentiated portfolio of products that address patient needs to treat wounds cross all the stages of healing and strong execution of our commercial strategy focused on leveraging multiple channels, new product introductions and brand loyalty.
We were pleased to see the overall environment improved during the third quarter.
And we reported 66% increase in total advanced wound care sales year over year, driven by a strong performance in the office channel.
We've talked about our strategic focus on the on the channel on prior calls and the growth reported in sales.
In our advanced wound care products. This quarter are a direct result of the continued strong execution of our commercial strategy in the office, which started over 18 months ago.
This third quarter advanced wound care sales growth was driven by strong demand not only from our existing customers, but also strong contributions from adding new customers in the office channel during the period.
Well, our broad portfolio of products and solutions remains a key differentiator for us the demand for our amniotic products from our advanced wound care customers has been notable throughout 2020.
Fresh amniotic membrane product DEFINITY was the largest contributor to growth again in Q3 driven.
Driven by the differentiated features of the product at our clinical customers value the positive reimbursement in the office channel.
We're also very encouraged by the performance of our pure apply franchise, where sales increased 29% year over year another quarter.
Glenn just continue to value the products clinical value.
And we continue to see growth in the number of accounts that are utilizing pure apply.
Aided impart by the introduction of new sizes, and the introduction of our XT lifestyle.
Which is selling extremely well.
I also wanted to discuss an important strategic acquisition that we completed during the third quarter and we announced in a preliminary third quarter results press release on October 14th.
The transaction with CP and bio science is an important one as it enhances our office strategy specifically.
Specifically, CP and physician office management solution and complimentary first line advanced wound care products further broadens, our physician offering and accelerates our growth opportunity in this exciting channel.
We are excited about the opportunity this acquisition presents we.
We expect this to be a longer term growth opportunity for going to Genesis, you will not contribute materially to our revenue and 2020.
In summary, we are proud of our third quarter performance the fundamentals of our business and strategy remains strong and we are well positioned to deliver strong operating and financial performance over the balance of 2020.
Accordingly, we reaffirmed our financial guidance, reflecting our expectation of total revenue growth of 19% to 20% year over year in 2020.
We also expect to generate positive net income and positive adjusted EBITDA for the full year 2020, which represents the achievement of an important profitability milestone well in advance of the state of interim period financial targets, we have discussed with the financial community over the last several years simply stated we believe our.
Operating and financial performance is a direct result of the strong execution of our growth and profitability strategy and the dedication of our employees talk customers and the patients they serve.
While we remain cautiously optimistic as it relates to the COVID-19 recovery in certain markets in the United States the impressive growth and financial performance. We have reported in the first nine months are result of our thoughtful strategy strong execution of our team and the differentiated portfolio of products that we have.
And with continued execution. We expect these drivers of performance to continue which is why we are confident in the expectation for improving growth and profitability implied by our guidance.
We look forward to continued success as we deliver on our mission to provide integrated killings solutions that substantially improved medical outcomes.
While lowering the overall cost of care.
And with that I'll turn it over to Henry our interim Chief financial officer to discuss the financial results for the quarter and.
Thank you Gary I will 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 of 2020 was 100.8 million compared to 64.3 million for the third quarter of 2019, an increase of 36.5 million or 57%.
Third quarter revenue results came in above the high end of the preliminary revenue range provided on October 14th.
Revenue from advanced wound care products for the third quarter of 2020 was 90 million compared to revenue of 54.3 million for the third quarter of 2019 and increase of 35.7 million or 66%.
Revenue from advanced wound care products represented 89% of total revenue in the third quarter of 2020.
Compared to 85% of total revenue in the prior year period.
Revenue from <unk>, surgical and sports medicine product third.
Third quarter 2020.
10.8 million compared to 10 million for the third quarter of 2019, an increase of 2.9 million or 9%.
Revenue from surgical and sports medicine products represented 11% of total revenue in the third quarter of 2020.
Compared to 15%.
Total revenue in the prior year period.
Revenue from pure applied products for the third quarter of 2020 was 40.9 million compared to $31.8 million in the third quarter of 2019, an increase of 9.2 million or 29%.
Revenue from pure play products represented approximately 41% of total revenue in the third quarter of 2020 compared to 49% of total revenue in the third quarter of 2019.
As of September Thirtyth 2020, we had approximately 295 direct sales representatives compared.
Compared to 265 at year end 2019.
Approximately 170 independent agencies.
Fair to 160 at year end 2019.
Gross profit for the third quarter of 2020 was $77.8 million compared to $45.1 million for the third quarter of 2019.
An increase of 32.7 million or 72%.
Gross profit margin for the third quarter of 2020 with 77% of revenue compared to 70% for the third quarter of 2019.
The increase in gross profit resulted primarily from increased sales volume due to the strength in our advanced wound care and surgical and sports medicine products.
Well as a shift in product mix to our higher gross margin products.
Operating expenses for the third quarter of 2000 $24.9 million.
Compared to 53.4 million for the third quarter of 2019, an increase of 1.5 million or 3%.
The increase in operating expenses in the third quarter of 2020 as compared to the third quarter of 2019 was driven primarily by higher selling general and administrative expenses, which increased to 51.1 million compared to $49.5 million in the third quarter of 2019.
An increase of 1.7 million or 3%.
The increase in selling general and administrative expenses is primarily due to a 6.4 million increase related to additional headcount primarily in our direct sales force and increased sales commissions due to increased sales.
<unk> point, Sixmillion increase and other selling costs, including credit card processing fees and royalties.
These increases were partially offset by a 3.3 million decrease.
Related to reduced travel and marketing programs and mid travel restrictions in place due to cope at 19.
6 million decrease in amortization associated with intangible assets.
Advertisers in an accelerated method.
No point 6 million decrease in legal consulting fees and other costs associated with the ongoing operations of our business and a point 8 million decrease in bad debt, primarily due to the collection of previously reserved related party receivables.
R&D expense was 3.7 million for the third quarter of 2020 compared to $3.9 million in the third quarter of 2019.
<unk> decreased 1.2 billion or 5%.
The decrease was primarily due to delayed enrollment in trials and limited clinical spending due to the COVID-19 pandemic.
Operating income for the third quarter of 2020 was $23 million compared to an operating loss of 8.3 million for the third quarter of 2019.
An increase of 31.2 million.
Total other expenses for the third quarter of 2020 were $2 million compared to 2.4 million for the third quarter of 2019.
Decrease of.
Half million or 19% the.
The decrease is primarily due to a 1 million decrease in legal accruals.
Related to the settlement of an assumed intersil lawsuit from the sellers of New Tech medical in October 2020.
We assumed the legacy lawsuit as part of the resolution of the deferred acquisition consideration dispute with the sellers of New Tech medical in February 2020.
The decrease in total other expenses net.
This was partially offset by a half million or 22% increase in interest expense, resulting from the increased borrowings under the 2000 I think credit agree.
Net income for the third quarter of 2020 was $20.9 million or 19 cents per share compared to a net loss of 10.7 million or 12 cents per share for the third quarter 2019 and three.
31.7 million.
Adjusted EBITDA of 24.6 million for the third quarter of 2020.
Compared to adjusted EBITDA loss of $4.8 million for the third quarter 2019 Ann.
An increase of 29.4 million.
We have provided a full reconciliation of our adjusted EBITDA results in.
In our earnings release form 8-K, and form 10-Q, all of which were filed with the FCC. This afternoon.
As disclosed in our preliminary third quarter of 2020 press release on October 14th 2020, we acquired certain assets and assumed certain liabilities of CP on bio Sciences on September 17, 2020.
The aggregate consideration amounted to 19 million as of the acquisition date, which consisted of 6.4 million in cash.
A million 151438 shares of our common stock with a fair value of 8.8 million and.
Contingent consideration with a fair value of 3.8 million.
At the closing we paid $5.8 million in cash and issued 1 million 947953 shares of our class a common stock.
Meaning consideration was held back and will be paid reissued.
Applicable 18 months after the closing date subject to any offsetting indemnification claims against CPM.
The results of operations of Cpms have been included in our consolidated financial statements beginning on the acquisition date.
Revenue and expenses of CPM Cynthia.
Acquisition date were not material.
Turning to a brief review of our financial results for the nine months ending September Thirtyth 2020.
Net revenue for the nine months ended September Thirtyth 2020 was 231.5 million.
Care to $186.3 million for the first nine months of 2013.
An increase of 45.2 million or 24%.
The increase in net revenue was driven by an increase of 43.6 million or 28% in net revenue of advanced wound care products, and an increase of $1.5 million or 5% in net revenue of surgical and sports medicine products compared to the prior year.
Net revenue a pure play products for the nine months ended September Thirtyth 2020 were 100.2 million compared to $86.9 million for the first nine months of 2019.
An increase of $15.1 million or 17%.
Net revenue of pure play products represented approximately 44% of net revenue for the nine months ended September Thirtyth 2020.
Parents or 47% for the first nine months of 2019.
Gross profit for the nine months ended September Thirtyth, 2020 was 169.7 million or 73% of net revenue compared to 130.8 million or 70% of net revenue for the first nine months of 2019.
An increase of $38.9 million or 30%.
Operating income for the nine months ended September Thirtyth 2000 25.6 million.
Compared to an operating loss of 27.7 million for the first nine months of 2019, an increase of $33.3 million.
Net loss for the nine months ended September Thirtyth, 2000 $21.5 million or.
One cents per share compared to net loss of 36.1 million or 40 cents per share for the first nine months of 2019.
Now turning to the balance sheet.
As of September Thirtyth 2020, the company had $36.5 million in cash and $114.7 million in debt obligations.
Of which $15.7 million or capital lease obligations compare.
Compared to $60.2 million in cash and $100.6 million in debt obligations of which $17.5 million or capital lease obligations as of December 30, Onest 2019.
The net change in cash of approximately $23.5 million for the nine months ended September Thirtyth 2020 was driven by 19.5 million of cash used in operating activities.
16.4 million of cash used in investing activities.
Offset partially by 12.3 million of cash provided by financing activities during the period.
The principal drivers of the cash flows used in operating activities was a 19 million increase in accounts receivable, which is directly related to the substantial increase in sales as well as a build in inventory to support future sales.
Offset by non cash expenses, such as depreciation and amortization.
The increase in cash used in investing activities is principally due to the acquisition of CPM and continued investment in our infrastructure to support our growth.
As of September Thirtyth 2020, we were in compliance with the financial covenants under the credit agreement with SVB.
Quarter end, we had $59.7 million of outstanding borrowings under the term loan facility and $39.4 million of borrowings on the revolver.
We expect that our cash on hand as of September Thirtyth 2020, and cash flows from product sales will be sufficient to fund our operating expenses.
Capital expenditure requirements and debt service payments for at least 12 months following our 10-Q filing days.
Turning to a review of our 2020 revenue guidance.
As detailed in our press release. This afternoon, we are reaffirming our fiscal year 2020 revenue guidance originally issued on October 14th 2020.
For the 12 months ending December 30, Onest 2020, the company now expects net revenue of between $311 million and 314 million representing growth of approximately 19% to 20% year over year as compared to net revenue of 261 million for the 12 months ended December.
For 30 Onest 2019.
The 2020 net revenue guidance range assumes net.
Net revenue from advanced wound care products of between $273 million and 275 million representing growth of approximately 24% to 25% year over year as compared to net revenue of $221 million for the 12 months ended December 31st 2019.
Net revenue from surgical and sports medicine products of between 38 million and 39 million, representing a decrease of approximately 3% to 6% year over year as compared to net revenue of $40 million for the 12 months ended December 30, Onest 2019.
Net revenue from the sale of pure applied products of between 119 million and $121 million, representing a decrease of approximately 5% to 6% year over year as compared to net revenue of $127 million for the 12 months ended December 30, Onest 2019.
We also expect to report positive GAAP net income and positive adjusted EBITDA for the for fourth quarter and full fiscal year 2020 period.
In addition to the formal revenue guidance, we would also like to provide a few additional considerations when evaluating our growth expectations for fiscal year 2020.
This additional color is intended to help the investment community better understand the assumption supporting our revenue expectations for 2020.
First the largest contributor to our total company net revenue growth in fiscal year, 2020 will be sales or amniotic products, which at the midpoint of our full year range.
And the other growth of approximately 107% year over year in 2020.
This compares to the assumptions supporting our prior guidance range, approximately 60% growth year over year, which we just discussed on our Q2 earnings call.
Second we expect sales of our remaining non pure apply non amniotic products, which collectively form the group called Pmean other to decrease at the midpoint of the range approximately 8% year over year in 2020.
Expectation is unchanged from the assumption supporting our prior guidance range, which we discussed on our Q2 earnings call.
Third from the midpoint of our fiscal year 2020, net revenue guidance assumes purify sales declined approximately 5% year over year compared to our prior guidance, which called for pure play sales to decrease approximately 14% year over year.
The change in our Turkey guidance was driven by the stronger than expected sales performance in Q3, offset partially by a slight decrease in sales expectations for the fourth quarter, specifically guidance applies pure play sales will decrease by approximately 55% year over year in the fourth.
First quarter of 2020.
Following the transition to the high costs bundled beginning October Onest 2020.
Compared to prior expectations, which called for a pure play sales decreased approximately 45% to 50% year over year.
That said early pure supply trends in the quarter are encouraging.
With that operator, I will turn the call back to you.
Thank you.
If youd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using.
Please make sure.
Your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow up if you would like to ask additional questions. We invite you to add yourself to the queue again by pressing star one.
And our first question will come from.
Matt Miksic with credit Suisse. You May proceed with your question.
Hey, good afternoon. This is Nick filling in for Matt. Thanks, So much for taking the question.
I had two questions. The first one with the rise in Kobe cases throughout the U.S.
I guess have you seen any sort of impact on your physician office outside of GE.
Last couple of weeks I guess, when I had a follow up thanks sure. This is Gary Hi, Vic we havent seen a decline.
Klein at all in census in the in the office setting has been at the end of Q3, we did see.
A slight decline in access to the outpatient wound care center.
So we.
Maintain virtual contact with all our customers we havent seen.
An impact on sales in the outpatient setting.
They are at this point, but we have seen a trend of of some outpatient centers starting to limit access.
Great very helpful and just one follow up if I could.
You spoke about pure play trends in the quarter I was just wondering if you could kind of help us.
Learn what you what you've seen in the past couple of weeks with the pass through of inspired.
And how that expiration of pass through is impacting your larger pack sizes. Thus far thanks, so much.
Sure, it's still a little early to tell but.
But what we did see is we didnt see the decline in pure apply revenue in Q3 that we had seen in the past where six to seven weeks prior to the X.
Expiration of pass through we would see a decline we did not see that decline so that was important and encouraging.
We did introduce some new sizes, a pure apply and we've also accelerated our our office growth strategy with pure apply so both of those are doing well the office strategy sales of pure applied doing well our XC line extension in the office is doing extremely well and the new sizes.
We're introducing under the bundle to absorb some of those larger wounds are also doing well. So those are the positive trends that Henry head.
Alluded to.
Thank you.
You're welcome.
Your next question comes from Ryan Zimmerman with BTI G. You May proceed with your question.
Hi, Good evening, Gary and Henry Thanks for taking the questions.
Congrats on the strong quarter.
Maybe Gary just to start on the CPM Bio Sciences acquisition can you talk about the longer term rationale for that.
Acquisition.
Is it is it around the physician management component yes.
Thanks for that business or is it on their products.
Hey, you can offer maybe expand in some areas that we previously weren't and what is your thought.
And then I will follow up thank you.
Right.
Really more the access.
Additional accounts for us and the ability to reach even beyond the office all the way to the home eventually where we see a lot of the wounds moving so it's more of an access opportunity for us so that access generates additional product sales.
And they also have some first in line.
Advanced wound care products that we don't have so that also gives us an earlier introduction to patients.
Which will enhance our ability to sell or other products. So we expect that our products as well as their products.
We'll be pushed through that channel.
And it does office offer us the ability to stay connected to those customers.
On a daily basis. So there is also a greater share of voice for organogenesis within that channel and it's a more efficient way to communicate in the sell in the office channel.
Okay, Thats very helpful and then.
Maybe Henry for you.
Amniotic strove really strong margin performance this quarter it seems like.
And based on your guidance for the fourth quarter. So it would suggest that that should continue.
If you could just kind of help us with the puts and takes there thinking about the margins longer term.
Maybe as pair apply is left in the past or dynamics or lap.
Hi.
How can we think about margins, especially around the addicts are just driving.
Improved margin performance. Thank you.
We don't guide on our margin by product, but we feel very confident that the.
Trends, we have experienced.
We experienced here in Q3 will continue.
Understood. Thank you so maybe a little more color.
Ryan so.
Clearly pure play coming off a pass through as some ASP implications for the for the bundle but.
In the office, we we have.
EBITDA margin there, but our other products to your point, our amniotic technology.
And our line extensions of pure apply will help offset that margin decline and that you would naturally get for those larger pieces in the bundled sales.
Okay. That's helpful color. Thank you thanks for sure.
Thank you and as a reminder, second question you will need to press Star 100 telephone. Our next question comes from Steven Lichtman with Oppenheimer and company. You May proceed with your question.
Thank you Hi, guys, Gary I wanted to touch base on on affinity just given the extraordinary growth you're seeing.
And Karen and I.
Amiens in particular.
Any color you can provide on how much of what we're seeing in the near term has been sort of pent up demand.
Prior to being able to sort of re launch in the first half of this year versus.
Versus some of the expansion that you talked about with with your customers and what does that runway like you see and expansion into new customers and the office channel sure. So from you know there was some pent up demand for the product in Q2, because we did have some existing customers.
Back in 2018, but the growth yeah. The majority of the growth is from our existing customers that had not used affinity and the expansion of the customer base. So one of the advantages of our of our amniotic technology is we're really expanding the market.
And we're doing that with our amnion, but what we've also experienced in the offices all brands are growing in the office not just affinity so that.
That gives us confidence that we are expanding the market, we're doing that by adding customers and folks who haven't perhaps use some of the advanced modalities that we have now.
Got it okay.
Thank you and then just a follow up on and as we know the core but can you talk a little bit about the timing of that launch and and how you think that that will further add to the momentum in the in your amnion business.
So our.
Our expectation is novacor would.
Would be launched sometime in Q4 of next year. So one of the challenges we have with launching Novacor is the same manufacturer that manufacturers affinity and as I've said on a number of calls we're continuing to ramp up our affinity manufacturing each quarter.
It's one of the execution challenges we have ahead of us but it also you know takes up some of the capacity for Novacor. So it really depends on how long affinity continues to grow at the pace that is growing but right now we're projecting Q4 21 for the launch and we do expect it to be a significant.
Growth driver for the company in the future.
Great. Thanks, Gary.
Thank you.
At this time, we are currently showing no remaining participants in the queue and we are currently showing no remaining questions in the queue. At this time that does conclude.
The conference for today, Thank you for your participation.
You very much.
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