Q1 2022 Organogenesis Holdings Inc Earnings Call
Please standby good afternoon, ladies and gentlemen, and welcome to the first quarter 2022 earnings Conference call for Organogenesis Holdings, Inc. At this time, all participants have been placed in listen only mode.
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 <unk>.
Certainties described in the company's filings with the Securities and Exchange Commission, including item one a risk factors of the company's most recent annual report.
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 forward looking statements, whether as a result of new information future events or otherwise, except as required by applicable securities laws.
This call. So 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.
Conciliation of these non-GAAP financial measures and 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'd now like to turn the call over to Mr. Gary <unk> Senior Organogenesis Holdings, President and Chief Executive Officer. Please go ahead Sir.
Thank you operator, and welcome everyone to organic Genesis Holdings first quarter 2022 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 start with a high level review of our first quarter revenue results.
I will then provide a review of some of the recent operating highlights and after my opening remarks, Dave will provide you with a more in depth review of our first quarter financial results, our balance sheet and financial condition at the end of the first quarter and the guidance for 2022 that we reaffirmed in today's press release, and then we'll open up.
Well for questions.
Beginning with a review of our results in Q1, we reported net revenue of $98 1 million.
A decrease of 4% year over year, driven by flat growth in sales of our advanced wound care products and a 39% decrease in the sale of our surgical <unk> sports.
<unk> sports medicine products.
As expected the decline in surgical and sports medicine reflects the headwinds for our renew and you sell products. Following the exploration of the FDA enforcement Grace period that ended on May 31 of last year.
Excluding net revenues from these products total net revenue increased 1% year over year on an adjusted basis in the first quarter.
First quarter sales results came in above the high end of the growth expectation range, we provided on our fourth quarter conference call.
Advanced wound care and surgical sports medicine, and exceeded our expectations driven primarily by continued strength of our purified franchise.
Despite the challenging start to the quarter the team executed well as our growth strategy and competitive advantages continue to yield results for the company.
The strength of our expanded sales force the benefits of our comprehensive and differentiated portfolio of products and leveraging multiple channels, new product introductions and brand loyalty in the market.
Let me update you on the progress of each one of these areas in Q1 <unk>.
Commercial team, including 340 direct sales representatives continue to broaden penetration across the country and expand awareness of the benefits of our advanced modalities.
We believe our direct commercial team continues to represent a key competitive advantage for organogenesis.
Second our broad and highly differentiated portfolio of products is another key competitive advantage for us.
Sales of pure applied products increased 29% year over year exceeding our expectations.
Strategy to introduce new products and line extensions have enabled access to multiple sites of care and physician specialties and continue to drive strong demand for the pure play brand.
Sales of our amniotic products declined 32% year over year and declined 22% on an adjusted basis, excluding the sales of renew and yourself in the prior year period. These.
These results were largely in line with our expectations and reflect the impact of <unk> on our national launch of affinity. We continue to expect that portfolio of highly differentiated amniotic products to be the largest contributor to our company's net revenue growth for fiscal year 2022, and the midpoint of our full year revenue range.
<unk> continues to assume amniotic growth of approximately 12% year over year and 2022.
Lastly, in our PMA and other products net revenue declined 14% year over year in the first quarter driven by the expected impact of the suspension of Dermagraph manufacturing as part of our multiyear plan to consolidate manufacturing at our campus in canton.
Third we continue to make progress in diversifying our revenue across physician specialties and sites of care supported by targeted product development and commercial strategies to win in these key channels.
With respect to the overall operating environment in the first quarter.
As discussed on our Q4 call. Our first quarter results were impacted by rising Omnipod case counts, which impacted patient consultations treatment in elective procedures.
Staffing shortages increased restrictions and limitations on access challenged our ability to engage with new customers, particularly with the introduction of our new technologies. Additionally, we faced incremental headwinds in January as we discussed as our own employees, who were impacted by the virus.
Importantly, as we discussed on our Q.
Four call. We noted that we have seen material improvement in our business trends after the challenging January period, and the operating environment continues to show measured improvement in March as expected and our 22022 guidance continues to assume that we will see steady improvement in the COVID-19 related headwinds as we move.
Through the second quarter, and a more favorable operating environment over the second half of 2022.
We remain confident in our full year 2022 guidance expectations, which calls for net revenue in the range of 485 million to $515 million representing growth of 4% to 10% year over year on a reported basis and growth of 6% to 13% on an adjusted basis.
Yes.
We continue to expect stronger growth trends in the second half of 2022, driven by a combination of increasing contributions from our new products.
A return to a more normalized operating environment, assuming we continue to see progress and improvements in the COVID-19 related headwinds and an easier comparison related to the renew and new cell not contributing to prior year sales beginning on June one 2021.
Before I turn the call over to Dave I want to share some of my thoughts on a few operating highlights of note.
<unk> all going to Genesis was a leading sponsor at the 2022 symposium on advanced wound care are CWC in the spring.
Their conference in Arizona.
This was the first live presence at the CWC Spring conference in three years and our team was excited to make the most out of this valuable opportunity to engage with over 300 wound care experts health professionals and other attendees.
I am pleased with our team's focus on maximizing the opportunity to highlight the strong body of clinical evidence that supports our differentiated product portfolio and the organogenesis brands.
At the conference healthcare professionals across many specialties also <expletive> their use of the product of our products and the success they've had with our portfolio and their clinical practices.
Our speaker program led by our leading plastic surgeon, who spoke on the benefits of controlling wound environment with pure play and an innovated innovative wound healing properties of our affinity.
Ah CME symposium, featuring a multi specialty panel discussion with key opinion leaders investigating how randomized controlled trials based on real world evidence translates to evaluating wound care therapies.
And as opposing a symposium led by two prominent physicians discussing how they use patient indicators to determine appropriate cost of treatment for chronic wounds.
We also made significant progress in our ongoing phase III clinical trial of renewed for the treatment of knee osteoarthritis in Q1 now.
Notwithstanding COVID-19 related challenges are.
Our clinical team was able to complete enrollment of 50% of the patients needed for the trial and added investigational sites in Q1 as a result, we remain on track to complete enrollment in the first interim analysis of data for 50% of the enrolled patients by the end of the year.
In addition to new Journal publications regarding the use of renew were released in Q1 further bolstering our position as an evidence based leader and building on the 25 publications for our product portfolio in the last three years.
The renew publications provide a preliminary evidence for the products utility for the treatment of cartilage defects in osteoarthritis.
During the quarter. We also were notified that two important manuscripts for our pure play antimicrobial product for the management of chronic wounds were accepted for publication this summer.
Lastly, I'd like to highlight our recent announcement of the appointments of Michelle Porphyrin and Gilberto Quinn Taro to the company's board of directors effective may three 2020 to.
Michelle and Gilberto brings significant experience built over their respective careers working for companies ranging in size and scale across the health care industry and I look forward to their leadership and experience from a broad set of leadership roles, including operation clinical development quality compliance and regulatory affairs.
Michelle and Gilberto represent further enhancement to our board of directors are priority for organogenesis as evidenced by the five new independent directors, we've added over the last two years.
Breadth of experience and diversity of talent that our board of directors has is notable in this strategic insight will be extremely valuable going forward.
With that let me turn the call over to Dave for a review of our financial results in the first quarter, our balance sheet financial condition as of quarter end and a review of the 2020 to financial guidance, we reaffirmed in today's press release.
David Thank you Gary I'll begin with a review of our first quarter financial results unless otherwise specified all growth rates referenced during my prepared remarks are on a year over year basis.
But Gary mentioned, we are pleased with the solid start to the year given the challenging operating environment net revenue for the first quarter of 2022 was $98 1 million down, 4% and excluding renew and new cell. We grew adjusted net revenue by 1%.
Our advanced wound care net revenue for the first quarter of 2020 to 22 was 91.
$91 million essentially flat year over year.
Net revenue from surgical and sports medicine products for the first quarter of 2022 was $7 2 million down 39% driven by the suspension of marketing of our renew and new cell products in connection with the exploration of the Fda's enforcement Grace period on May 31, 2021.
Excluding sales of renew and new cell in the prior year period net revenue from surgical and sports medicine products increased 17% year over year in Q1.
Net revenue from <unk> products for the first quarter of 2022 was $53 3 million up 29%.
Gross profit for the first quarter of 2022 was $73 million of approximately 74% of revenue compared to 75% last year.
Operating expenses for the first quarter of 2022 were $72 2 million compared to $64 4 million last year, an increase of $7 7 million or 12%.
The increase in operating expenses in the first quarter was driven by a $5 $3 million increase in selling and general administrative expenses and a $2 4 million increase in research and development costs compared to the prior year period.
The year over year increase in selling general and administrative expense was primarily due to a $4 1 million increase related to additional headcount primarily in our direct sales force and a $2 million increase related to travel and marketing programs amid the relaxed COVID-19 travel restrictions.
Year over year increase in R&D was driven by planned step up in clinical study spend and related cost necessary to seek regulatory approvals for certain of our products.
Operating income for the first quarter of 2022 was <unk> 9 million compared to an operating income of $12 6 million last year, a decrease of $11 7 million.
Total other expenses for the first quarter of 2022 for $0 7 million compared to $2 5 million last year, a decrease of $1 7 million or 70%, primarily driven by the reduced interest rate for borrowings under the new credit agreement signed in August of 2021.
Net income for the first quarter of 2022 was $0 1 million compared to net income of $9 $9 million last year, a decrease of $9 8 million.
Adjusted EBITDA of $5 million for the first quarter of 2022% or 5% of net revenue compared to adjusted EBITDA of $16 million.
Or 15, 6% of net revenue last year and we've provided a full reconciliation of our adjusted EBITDA results in our earnings press release issued earlier this afternoon.
Turning to the balance sheet as of March 31, 2022, the company at $108 5 million in cash cash equivalents and restricted cash and $73 1 million and total debt obligations of which there are $4 1 million of capital lease obligations and this compared to $114 5 million in cash cash equivalents and restricted cash at $73 6 million and total debt.
Obligations of which <unk> 2 million were capital lease obligations as of December 31, 2021.
We also have up to $125 million available borrowings on our revolving credit facility as of March 31 2022.
Turning to a review of our 2022 net revenue guidance, which we reaffirmed in todays press release for 12 months ending December 31, 2022. The company continues to expect net revenues between $485 million and $515 million, representing an increase of approximately 4% to 10% year over year.
The 2022 net revenue guidance range continues to assume net revenue from advanced wound care products, increasing approximately 6% to 12% year over year net revenue from surgical and sports medicine products decreasing approximately 9% to 19% year over year and net revenue from sale of our pure play products increased approximately 4%.
The 9% year over year and.
And by the way a reminder, our 2021 results revenue results include approximately $11 million in revenue attributable to our renew and new cell products. During the five months ended May 31, 2021 at the end of the FDA enforcement Grace period, excluding sales of renew and new cell for the first five months of 2021, our 2022 revenue guidance implies.
A 6% to 13% on an adjusted basis.
In terms of our profitability guidance for 2022, the company expects to generate GAAP net income of between $41 2 million and $52 7 million adjusted net income of between $47 3 million at $58 8 million note. The Companys net income and adjusted net income guidance ranges reflect incremental operating expenses related to a REIT.
We announced restructuring activities and our revised GAAP tax rate assumption for the 12 months ended December 31, 2022, we also expect EBITDA of approximately $73 million and $85 7 million and adjusted EBITDA of between $79 9 million and $95 3 million.
In addition to our formal financial guidance for 2022, we're providing some considerations for modeling purposes, our full year 2021 guidance ranges assume.
Sales of our amniotic products will hit the midpoint of our full year net revenue range increased approximately 12% year over year sale.
Sales of our non <unk>, non amniotic products, which collectively form the group both PMA and other will decrease at the midpoint of the range of approximately 5% year over year.
Gross margins of approximately 76%.
Total GAAP operating expenses will increase approximately 10% to 15% year over year compared to our prior expectation for growth in the range of 9% to 13% year over year and this increase is related to incremental restructuring expenses of approximately $3 $2 million related to the next phase of our <unk> consolidation.
Total interest and other expenses of approximately $3 5 million GAAP tax rate of approximately 25% compared to guidance, which assumed a GAAP tax rate in the low single digits noncash D&A and noncash stock comp expense of approximately $12 million and 6 million, respectively, and weighted average diluted shares of approximately $134 million.
We also expect 2022 capex to be approximately $70 million to $75 million the quarterly cadence of capital expenditures continues to be impacted by the pace and timing of each phase of our multi year manufacturing buildup, but they can't canvas.
Finally, as Gary discussed earlier, we are seeing measured improvement in the operating environment as expected, we expect our second quarter net revenue results to reflect improving growth trends as compared to the first quarter. Specifically, we expect our Q2 net revenue to be in the range of flat to down 3% year over year on an as reported basis note excluding the sales renewing.
So from the prior year period, our second quarter sales exceeded expectations reflect growth of 2% to 4% year over year on an adjusted basis.
With that operator, I will turn the call back over to you.
Thank you, Sir if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. 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.
And our first question will come from Danielle <unk> from SVP Leerink.
Hey, good afternoon, guys. Thanks, so much for taking the question congrats on the solid start to the year.
Yes.
Quick question on the amniotic product line and affinity specifically.
Came in a little bit below what we were thinking I guess.
Number one you maybe we mis modeled it a little bit here, but.
But any incremental color you can give on what you saw exiting the quarter and sort of how that's trended so far in April as it relates to that product line and then secondly, secondarily what gives you the confidence that that's going to be the primary growth.
<unk>.
The 2020 guide and then I have one follow up.
Sure.
So this is Gary So Q1 was for affinity was as expected for us with the National launch we had to relaunch the product again in Q1. So you have a rate change. We also had the issues we've discussed that everybody had with omnicom.
It was a slow start for sure the <unk>.
<unk> that we're seeing now are very positive.
We're adding new accounts.
In multiple sites of care for the product and the sales trends over the last four to five weeks of X with us.
Quite strong so.
We feel that the rest of the year with the national launch and with the second half of the year.
The operating environment, improving that we'll be able to continue to expand the use of the product across the country.
Got it that's helpful. Thank you for that and then on my follow up from pure play and just very strong pure play quarter.
Why.
Reiterating that the guide there given the strength in pure apply and the confidence around.
In Indiana, excuse me improving as we move through the year. Thank you so much for taking the question. Thank you Danielle.
So.
We expect the pure play brand to do well we do.
So we'll have a national launch of one of our Skus in the second half of the year.
And with that similar to what we've had with affinity we expect a bit of a pause as people readjust too.
The change in.
And reimbursement for the product so.
That's built into our guidance, that's what we expect but we are seeing positive trends with the product in multiple sites of care.
Thank you.
Yeah.
Our next question comes from Steven Lichtman with Oppenheimer and co.
Thank you hi, guys.
Wondering if you could give us an update on the commercial organization. What are your latest thoughts in terms of how much you are looking to grow that book direct.
As long as Youre, a distributor relationships this year.
Sure. So our expectation is that we will add approximately 50, new direct sales representatives.
We will continue to add to our agencies, but as we continue to look at our agencies. We're also looking at the competency in and where those agencies sell so we may not see a big jump in our agencies, but we certainly may see a different group of agencies as we move forward.
Okay got it and then.
You mentioned, Gary about the long term pipeline of course with knee OA, but.
Maybe you could have an update on the <unk>.
Medium term pipeline relative to Novacor.
And on the on the burnt the burn products and sort of where you.
We're at.
Jos.
Sure. So novacor, we have started the soft launch of <unk> as we've guided and we're in that process now.
We expect to have more of a national launch, though we'd probably still will be controlled in the middle of Q3 end of Q3.
But the broader product transit we're in a clinical experience process right now reintroducing the product.
We won't be able to make the product and sell the product to scale until our manufacturing facility is built out here in canton.
That won't be till the middle to the end of 2024.
That's what we'll be able to make it to scale.
And launch it nationally.
Got it thanks Kerry sure Steve.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Sorry, your question press the pound key.
Our next question comes from Ryan Zimmerman with BTG.
Hey, Thanks for taking my questions Gary Dave a couple for me So you know as.
As I think about the Medicare part D pricing into the second quarter affinity held pretty steady.
Apograph in Thermograph Marshall Dermagraph was down, but I guess that really doesn't matter with the manufacturing suspension, but <unk> was down a little bit quarter over quarter. I'm. Just wondering if you could kind of speak to the puts and takes with.
The ceiling rates that are set for the second quarter and your expectation.
From Medicare if you will around what cant be applied as we move through the balance of the year.
So you're correct about dermagraph itself. The market is not really relevant I think as it relates to pure apply it's important that when you look there there are two <unk>.
Asps, so you've got pure apply.
Which is a very insignificant component of the brand and then you have pure apply a M.
As more of a.
The brand so there's not much change in the pure apply AAM.
Number at all it's really the pure apply which doesn't include the anti microbial component, which is insignificant as it relates to the products.
Nothing significant there as it relates to pure apply moving forward through the year.
The ASP is.
Basically what you sell the product for.
And that it'll move as as and if the product pricing is different over time.
So thats the expectation is it will move with the pricing of the product.
Yes.
Fair, Gary and to your point I mean pure play am was only off by a percent or two a quarter to quarter, but when you mentioned pricing moving with the product I mean.
Are you expecting.
Institute any pricing changes this year should we assume that those are fairly steady.
Well, we havent.
<unk> discussed and we're not going to discuss our pricing strategy, but if there is a price movement. It will get reflected in the in the Asps when filed.
And where it will show up on those on those schedules.
Okay.
That's helpful and then if I could follow up on two other questions for you Dave.
The restructuring program.
If you could just talk about I understand kind of the initial hey, you are taking there on the net income guidance.
Adjusted EBITDA is holding steady, but what do you expect to come out of that.
In terms of savings over time, and if you can just talk about gross margins were a little below 70% sure. Your guidance is calling for 76%. So what what gives you that gross margin lift for the remainder of the year.
Sure sure. So the first one is really just a continuation of the consolidation into the campus. It's taking some of the shipping and quality capabilities for the amniotic portfolio into cans. So it's really just increasing capacity and efficiency from that standpoint.
On the gross margin side I mean, we really came in really relatively consistent with what we'd expected and so.
Really it was relatively low revenue for the quarter and so we had some negative leverage on the fixed cost in that type of thing, which will reverse itself as it goes through the year. We also had we had another impact where we kind of had a little bit of a COVID-19 impact that spilled over from Q4, where we did see some excess returns as well. So we sold some product in Q4.
And spilling into Q1, some of the procedure for canceled as such and so had some impact on the gross margin, which we don't expect to repeat.
Thanks for taking my questions.
Thanks, Ron Thanks, Ryan.
Our next question comes from Matt <unk> from Credit Suisse.
Hey, guys. Thanks for taking the question.
And congrats on a good start here.
Especially given given kind of the slow January and continuing challenges around affinity so I wanted to.
To ask a little bit about.
The strength in pure play and I guess.
What appears to be.
Your team sort of.
Helping to backfill some of.
The slowness either from discontinued products or from.
Sort of relaunch as you described of affinity.
I'm, just wondering I mean that feels like upside versus maybe where you thought peer apply would've been.
This quarter absent absent the withdrawal of those products and I'm just wondering.
How much of that is sustainable and as affinity comes back.
We anticipate that.
Staying or is there any reason why that needs to sort of ease again to land you in your full year guidance, you'll have to get your thoughts on that and I had one follow up.
Sure I'll start and David can share.
You'd like so you are correct that we do have the ability from a share of voice perspective, our commercial team.
We will shift share of voice from time to time, when we run into certain headwinds in a particular quarter.
One was COVID-19.
So that's helpful. As we balance our share of voice throughout the year to balance off our portfolio, we expect <unk> to come in line with our guidance we do have.
As I mentioned, one SKU that will be going but we expect it to go.
Published list it will have to relaunch that product.
In a different environment, but have the ability to launch it across the country as we do with affinity so.
All of those moving parts, we've kind of built into our guidance.
But the brand is still performing extremely well.
Okay.
I think that's right Gary I.
I think we just continue to see good performance from that well established brands so in difficult periods, even in the January timeframe.
The business performed well so.
We're pleased with that.
That portfolio.
Okay, so the portfolio, including amniotic tissue products kind of gets you through your guide.
As you've laid out this year and then.
Does next year, then and maybe if you could talk a little bit about what this.
What this national relaunch could mean for the SKU SKU in.
Pure play and I'm, sorry, but I did have just one quick follow up on affinity if I could.
Sure.
So we expect that in the second half of the year that we would have a published rate for.
One of our pure play products and we will go through the same launch process as we did with affinity where there'll be a little bit of a pause as all of the.
The hospitals.
Doctor offices readjust to whatever the rate environment is at that time.
And then we have the opportunity to launch it across the country. So it will take share of voice.
From our sales representatives as they are launching that product.
That's what we're expecting so we'll see a little bit of a decline in the back half of the year at least in Q3, and then start to hopefully grow again in Q4.
Got it and then just quickly on affinity you had mentioned a few things one obviously the relaunch and you've it seems like youre encouraged by that.
New accounts and building momentum here in Q2.
But then also kind of the sort of infection trends in disease trends I mean is that.
Activity levels do you feel like that still still a factor here in the second quarter or is that behind you and we're just we're just dealing with execution on the on the relaunch in new accounts or is that still something that somehow.
Affecting affinity here in Q2.
No I think it's just it's execution that's really what it is now we are kind of behind you.
Pretty much the pause that we talk about that's pretty much in the rear view mirror, we still see a little bit of that in certain pockets of the country, but it's primarily execution and launch and in continuing to expand it in the surgical channel.
Area that where we're seeing some nice trends at this point.
Excellent okay, well thanks for the color.
Sure Matt.
We are currently showing no remaining questions in the queue. At this time that does conclude our conference for today. Thank you for your participation participation.
Thank you very much.
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