Q3 2022 Organogenesis Holdings Inc Earnings Call
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Okay.
And welcome to the third quarter 2022 earnings conference call for Oregon, Genesis Holdings, Inc.
At this time, all participants have been placed in listen only mode. Please.
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.
As 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 and it subsequently filed quarterly report.
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 G. A a P.
We generally refer to these as non-GAAP's financial member mesh is being measured.
Reconciliations of those non-GAAP's financial measures to the most comparable measures calculated and presented in accordance with G. AAP 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. <unk> SR.
Oregon has just asked for things President and Chief Executive Officer. Please go ahead Sir.
Thank you operator, and welcome everyone to organic Genesis Holdings third 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 will cover during our prepared remarks.
I'll start with a high level review of our third quarter revenue results and some recent operating highlights.
After my opening remarks, David will provide you with a more in depth review of our third quarter financial results, our balance sheet and financial condition at the end of the third quarter and the guidance for 2022 that we updated in today's press release, and then I'll open it up for questions.
Beginning with a review of the third quarter.
We reported net revenue of $116 $9 million, an increase of 3% year over year.
Driven by a 2% increase in sales of our advanced wound care products and a 15% increase in the sale of our surgical and sports medicine products.
Third quarter sales results came in below the guidance range, we provided on our second quarter call.
Driven primarily by softer than expected growth in our advanced wound care products, while sales of our surgical and sports medicine products were roughly in line with our prior expectations.
We believe that hurricane and impacted demand in Florida in the last week of the quarter, we estimate that excluding this hurricane related business disruption, we would've delivered advanced wound care sales results within the low end of our third quarter guidance range.
As expected we experienced continued improvement in the COVID-19 related headwinds as patient visits improved in quarter, three but customers are continuing to struggle with staffing challenges, particularly customers in the physician office setting.
While we were pleased to see these headwinds show measured improvement, we experienced a more challenging operating environment in the physician office setting versus what we had assumed in our previous guidance.
Importantly, despite unexpected challenges in the quarter the team performed well as we continue to execute against our growth strategy and leverage our competitive positioning including the strength of our expanded sales force the benefits of our comprehensive portfolio and leveraging multiple sales channels and new product introductions, including our brand loyal.
<unk>.
Let me update you on the progress of each of these in Q3 first our commercial team has grown to 365 direct representatives up 11% year over year, and we believe our commercial team continues to represent a key competitive advantage for organogenesis.
The strength of our sales force enables continued expansion across the country and deeper penetration as our team increases awareness of the benefits of our advanced technologies.
Second we continue to make progress in diversifying our revenue across physician specialties and sites of care by targeting our product development and commercial strategies to drive growth in these key channels.
Excluding renew new sell in Dermagraph the team delivered low double digit growth in number of accounts served in both the hospital outpatient setting and the physician office setting compared to the prior year.
Third our broad and highly differentiated portfolio of products continues to be a key advantage for the company.
Sales of our pure applied products increased 12% year over year, our long term strategy to introduce new products and line extensions have enabled access to multiple sites of care, including new physician specialties and continue to drive strong demand for this well established highly differentiated pure play brand.
Our portfolio of pure play technology has expanded in Q3 as we received five 10-K clearance for pure apply MZ, representing a continuation of brand extension strategy of the pure applied product portfolio.
Pure play <unk> Leverages, the innovative properties of our pure play technology engineered into a micronize or powdered form to provide surgeons with an option for complex surgical wounds and we expect <unk> to be a material driver of growth in our surgical and sports medicine product roofing when it answers the full market in Q.
One of 2023.
While we were pleased to see continued strong adoption and utilization of our pure play product sale of our non pure pipe portfolio of products declined 6% year over year in Q3.
The decline in non pure applied products was driven by a 21% decline in net revenue from our PMA and other products offset by partially by a 2% increase in the sale of amniotic products compared to the prior year.
The year over year decline in PMA and other sales was directly related to the prior year comparison, which included Dermagraph sales, which were suspended in the second quarter of 2022.
PMA and other sales increased.
Mid single digits.
Excluding the impact of derma graft in the period.
Sales of amniotic products increased low single digits versus our expectation for low double digit growth.
Year over year in Q3.
While sales of our amniotic products increased on both a year over year basis, and a quarter over quarter basis in Q3, our amniotic sales results were impacted.
By continued competitive pressure in the office channel, which challenged our share of voice and slowed adoption of our amniotic technologies with new customers.
We also continue to see impacts on existing customer demand as a result of aggressive pricing strategies from small amniotic players leveraging the lack of CMS published asps.
For the skin substitute products.
But despite this more challenging environment for our amniotic products in the office channel, we successfully leveraged our diverse portfolio and drove strong growth of our pure applied brand.
Again in Q3.
Simply stated we are navigating an unexpected challenges and one of our key markets considering the circumstances, we have developed and delivered year over year growth in sales of our advanced wound care products during the same.
The first nine months of 2022 fueled by our team's success in leveraging our diversified portfolio of products, including impressive growth from our purified brand with sales have increased 37% year over year for the first nine months of 2022.
And while our revenue growth has been paced by unexpected headwinds. This year, we have expanded the number of accounts using our products over the first nine months of 2022 in both the <unk> and physician office setting, which speaks to the success in executing against one of our key long term growth strategies.
We've updated our full year 2022 guidance, which now calls for net revenue in the range of 448 million to $465 million.
Which at the midpoint represents a decline of approximately 2% year over year on a reported basis and essentially flat year over year on an adjusted basis.
Our full year 2022 revenue guidance now reflects a more challenging operating environment in the physician office setting in the fourth quarter compared to what our prior guidance had assumed specifically we expect sales in the physician office setting to be impacted by continuing competitive pressure from smaller amniotic.
Players and overall market disruption driven by reimbursement uncertainty related to CMS is publishing of Asps for skin substitute products. This year.
Importantly, we believe this competitive pressure from amniotic players will continue until CMS moves forward with publishing Asps.
That said, we continue to believe that we are well positioned with our unique customer value proposition offering a broad portfolio of products across the continuum of wound care diversified revenue sources across multiple sites of care and physician specialties and our broad commercial reach.
While the office channel is facing challenges. This year, we continue to grow our customer base and build on our leadership position in the office setting as well as in wound care centers across the United States long term, we will continue to be a leader in the advanced wound care space by launching highly innovative highly efficacious products as we deliver on our <unk>.
To provide integrated healing solutions that substantially improve outcomes, while lowering the overall cost of care.
Before I turn the call over to David I wanted to provide you two operational items of note first.
As disclosed in our 10-Q filing with the SEC. This evening the company decided to pause the construction of one of our canton, Massachusetts manufacturing facilities the.
The decision was made in response to the material increase in the expected investment for this facility due to the inflation in materials and construction costs in recent years.
Specifically the latest estimated project total investment represented a 40% increase from the original budget that we established two years ago.
We simply cannot justify allocating capital to this endeavor given the material change and required investment. We are currently evaluating potential alternatives and we will provide updates as key decisions regarding alternatives are made going forward.
And it's important to note that the decision to pause the construction of this manufacturing facility will not impact our ability to meet our markets demand for our existing commercial commercialized products or our ability to achieve our target of greater than 80% gross margins in the future.
Second we continue to make progress during the third quarter and our ongoing phase III clinical.
Clinical trial for renewable for the treatment of knee osteoarthritis, our clinical team has enrolled more than 82% of the patients needed for the trial.
<unk> has activated seven additional investigative sites as well as implementing additional recruitment strategies to further accelerate the pace of enrollment over the balance of 2022, we continue to target the completion of enrollment by the end of the year. We also remain on track to complete the first interim analysis of data for 50% of the subjects.
In late Q4.
We are also planning to submit an IND amendment to the FDA and expect to be ready to launch a second phase III trial by the end of the second quarter of 2023.
We have determined that at this stage, it's best the best approach from a timing and regulatory perspective is to submit the IND Amendment and moving forward immediately as it allows the company to initiate a second phase III study as soon as possible and leverage the major operational advantages we have of continuing with the current active <unk>.
<unk> site. This plan essentially gives us more options in our regulatory approach.
This is based on our strategy of presenting to the FDA. The completed 200 patient randomized controlled trial and the current phase III trial as valid scientific evidence of renew safety and efficacy for knee osteoarthritis and thus why the second FDA trial, a phase III study should not be read.
Quiet.
Finally, I want to share a few thoughts on the announcement from CMS on November 2nd regarding the proposed changes for Medicare payments under the physician fee schedule for advanced wound care treatment.
By the way a reminder, CMS issued proposed rule in July which represent a first step to standardize reimbursement for all types of wound care delivered in the physician office, including cellular and tissue based products.
Based on the feedback received during the open comment period, CMS decided it would be beneficial to provide interested parties more opportunity to comment on the specific details of changes in coding and payment mechanisms prior to finalizing a specific date when the transition to a more appropriate and consistent payment and coding for these products will be.
<unk>.
CMS is conducting a town hall in early 2023, and we look forward to participating in this event as well as continuing our engagement with them on this important initiative.
With that let me turn the call over to David for a review of our financial results in the third quarter, our balance sheet and financial condition.
As of the end of the quarter and review of our 2022 financial guidance that we updated in today's press release, David. Thank you 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 of 2022 was $116 9 million up 3% our advanced wound care net revenue for the third quarter of 2022 was $109 5 million up 2% year over year and net revenue from surgical and sports medicine products for the third quarter of 2022 was $7 3 million up 15%.
Net revenue from our pure play products for the third quarter of 2022 was $63 7 million up 12%.
Gross profit for the third quarter of 2022 was $90 7 million or approximately 77, 6% of net revenue compared to 77% last year.
And gross margin.
Impaired to the prior year was driven primarily by changes in product mix.
Operating expenses for the third quarter of 2022% or $88 9 million compared to $71 3 million last year, an increase of $17 6 million or 25%.
The increase in operating expenses in the third quarter of 2022 was driven by a $17 million or 27% increase in selling general and administrative expenses.
Is there a <unk> 6 million or 7% increase in research and development costs compared to the prior year.
The year over year increase in selling general and administrative expense was primarily due to additional head count primarily in our direct sales force and higher spending in travel and marketing programs and mid relaxed COVID-19 travel restrictions.
The year over year increase in R&D was driven by a step up in clinical study spin and related cost necessary to seek regulatory approvals for certain of our products.
Third quarter 2022, GAAP operating expenses included certain non operating items, there was a $4 $2 million charge related to the disposal of certain equipment related to the construction in progress and one of the company's canton, Massachusetts facilities.
<unk> 6 million of cancellation fees incurred in connection with the company's decision deposits manufacturing facility construction project in.
<unk> 6 million of employee retention and benefits as well as other exit costs associated with company's restructuring activities.
This compares to certain non operating items totaling $1 2 million in the prior year period.
Excluding these non operating items and noncash intangible amortization of $1 2 million and.
In fair value of contingent consideration of <unk> 9 million in the prior year period non-GAAP operating expenses for the third quarter of 2022 increased 19% year over year.
We have a detailed reconciliation of these nonoperating in noncash items in our press release this afternoon.
Operating income for the third quarter of 2022 was $1 8 million compared to operating income of $16 3 million last year, a decrease of $14 5 million.
Total other expenses for the third quarter was <unk> 6 million compared to $3 4 million last year, a decrease of $2 8 million or 83%.
Given primarily by the prior year period, including a $1 9 million of loss on extinguishment of debt, which did not impact the financial results in the third quarter of 2020.
The remaining year over year decline in total other expenses in the third quarter of 2022 is attributable to reduced interest rate for borrowings under the new credit agreement signed in August of 2021.
Net income for the third quarter of 2022 was zero point $2 million compared to income of $12 6 million last year, a decrease of $12 4 million adjusted.
Adjusted EBITDA of $11 6 million for the third quarter of 2022 or 10% of net revenue compared to adjusted EBITDA of $21 seven or 19% of net revenue last year. We have provided a full reconciliation of our adjusted EBITDA results in our earnings press release issued this afternoon.
Turning to the balance sheet as of September 32022, the company had $108 million in cash and cash equivalents and restricted cash and $72 6 million and total debt obligations compared to $114 5 million in cash and cash equivalents and restricted cash and $73 6 million and total debt obligations of which <unk> 2 million were capital lease obligations.
As of December 31, 2021.
As a reminder, we also have up to a $125 million of available borrowings on our revolving credit facility as of September 32022.
Turning to a review of our 2022 net revenue guidance, which we updated in our press released this afternoon for 12 months ending December 31, 2022. The company now expects net revenue between $448 million and $465 million, representing a decrease of approximately 1% to 4% year over year and roughly flat on an adjusted basis.
Excluding sales of renew and new cell for the first five months of 2021.
The 2022 net revenue guidance range now assumes net revenue from advanced wound care products is flat to down 2% year over year net revenue from surgical and sports medicine products decreased approximately 11% to 25% year over year.
And net revenue from sale of our pure play products increased approximately 27% to 31% year over year.
But we are a reminder of 2021 results include approximately $11 million in revenue attributable to 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 these the renew and new cell for the first five months of 2021, our 2022 revenue guidance it implies roughly flat growth year over year on an adjusted basis.
In terms of profitability guidance for 2022, the company now expects to generate GAAP net income between $12 million or $20 million.
Adjusted net income between 22% and $31 million.
We also expect EBITDA of between $31 million and $42 million and adjusted EBITDA between $46 million and $58 million.
In addition to a formal financial guidance for 2022, we're providing some consideration for modeling purposes. Our full year 2022 guidance range now assumes sales of our amniotic products will decrease at the midpoint of our full year net revenue range of approximately 28% year over year in 2022 compared to prior guidance, which assumed a decline of approximately 15 <unk>.
<unk> year over year.
Sales of our non pure play non amniotic products, which collectively form the group called PMA and other will decrease at the midpoint of the range.
Nearly 19% year over year in 2022 compared to our prior guidance, which assumed a decrease of 17% year over year.
Gross margins of approximately 76, 5% to 77% total GAAP operating expenses will increase approximately 15% to 16% year over year as compared to our prior expectation of growth in the range of 13% to 16% year over year, which includes the non operating charges of $4 8 million related to the $2 75, Dan Road project.
Total interest and other expenses of approximately $2 8 billion compared to $3 5 million previously and a GAAP tax rate of approximately 30% compared to 27% previously.
Noncash D&A and noncash stock comp expense of approximately $11 million and 6 million, respectively with a weighted average diluted share count of approximately $132 million.
We now expect full year 2022, capex to be approximately 30% to $35 million compared to $50 million to $60 million previously.
With that operator, I will turn the call back over to you.
Thank you Sir.
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Our first question is from Steve Lichtman with Oppenheimer.
<unk>.
Thank you hi, guys.
I was wondering Gary if you could talk to.
What within the Ami on business.
Perhaps got worse from the second quarter call or didn't get better as you would've expected at that time.
Maybe you could drill down a little bit more specifically on that.
So I think the competitive pressure that we talked about in Q2 has continued.
Without the publishing of Asps for all of the products that are out there.
There is a lot of aggressive pricing and rebating and discounting that continue so and we see that consistent maybe slightly a little bit higher but we also see more confusion in the market with reimbursement.
With the physician fee schedule coming out Theres, a lot of confusion, particularly in the office setting where they don't necessarily have sophisticated reimbursement support in that setting and understanding what it means.
As well as the non published ASP.
Issue. So a lot of a lot of noise a lot of confusion.
<unk> that we.
We don't see clearing up and certainly didn't project that that would be the case.
Until CMS publishes these asps and brings clarity obviously to physician fee schedule or at least that clarity is being able to be delivered to the office space. So they understand exactly what's happening.
Okay.
And then I guess, just as a follow up on on new products you mentioned.
On the pure play side, but I don't think you mentioned anything on <unk>. So any update there and then does the the changing your thoughts on the facility expansion impact translate at all or is that separate.
So on Novacor is we had a soft launch.
That product is being launched right now.
As we've guided we didn't expect that it would have a significant impact in this last quarter.
But we expect that it will have more of an impact certainly next year. If the clinical results that we're getting from the field are very strong.
The handling is a little little different a little better and.
Clinicians really appreciate the product.
Regarding transit Youre correct, our trans site and Dermagraph were both scheduled to be manufactured in our new facility. So we do have alternatives that we're looking at.
And.
We will update you when those alternatives are actually coming forward, but we do have some additional alternative strategies in particular to get those products out on the market.
Okay I'll leave it at the two and jump back in queue. Thanks. Thank you.
Thank you very much.
Our next question will be from Ryan Zimmerman with BP.
Brian .
Yes. Thank you can you hear me okay.
Yes, Ryan we can okay.
Good afternoon, Thanks for taking my question.
Gary I wanted to follow up on a couple of things you cited a lot of factors this quarter.
Hurricane impact.
The impact of the office staffing et cetera.
If you could kind of parse out or not.
How the magnitude of each.
And how to think about each of those factors.
As we move into fourth quarter I mean.
I can appreciate that competition is not abating as you had expected previously but.
This is kind of a multipart question, Gary but but.
What's your expectation for when that does abate.
And and then I have a couple of follow ups.
So I mean, the hurricane is situational it just happened.
And just affected our last.
<unk> of sales.
Folks started to shut down a little bit before is Ford hit and then the last day, we had some.
Challenges getting product out down into the Florida area. So.
Certainly affected our ability to jump into the range the guidance range, but we're still we're going to be at the lower end of the range.
And that speaks more to <unk>.
Reimbursement confusion as well as the competitive pressure as you mentioned, so when does the competitive pressure and I think.
And others feel clear.
Clearly publishing everyone's asps.
As the first step in a major step of just leveling the playing field.
And allowing that competitive pressure to on <unk>.
Pricing and Rebating to end.
That's important and once there's clarity I think in Cms's physician fee schedule ruling and how that.
Those changes are going to take place and how it will be calculated all the questions. We've all asked I think that overhang will what kind of lift.
Our feeling as I've said before is we.
We see that the delay in the CMS filing is a good thing that theyre looking for more input. They are looking for industries input as well as clinical input what's.
Whats the right strategy here to make sure patients still have access.
To that site of care and all of the products that those patients needs. So.
We think.
That will help us significantly are well as well in the competitive area with reasonable results in the office.
Through extremely well at site and we will continue to add share.
With a reasonable change in that side of care.
Okay.
Follow ups for me, if I could though just to be clear I think CMS published the rate for affinity in the fourth quarter down 12% I just want to make sure that that's correct.
That.
Also more of a near term impact and kind of how you how do you expect that.
Follow as we move into 'twenty three.
Yes, I mean, we don't talk about pricing strategy going forward, but it definitely was down we did take the price down and part of that is related to this intense pricing competition that we're experiencing right now so the commercial team is very focused on ensuring that they understand what's happening in each of these accounts.
And doing everything they can to combat the situation that we're in right now, but I mean, the fundamentals are strong still in the business.
And I think the fact is as the commercial team as you know quite broad and we'll continue to push that forward. We continue to build out our customer base and so they're doing a great job from that standpoint, it's just not growing as fast as we would like but okay, but clearly under the new guide, excluding renew a new cell and dermagraph really getting down to <unk>.
Sure we're still.
Growing modestly and so we feel good about the foundation and fundamentals of the business.
And I don't know if you want to comment right now on 23, guys I mean, I know it's early but.
What is your expectation for just the overall growth rate of the business be it of advanced wound care surgical and sports medicine, as we think about 2003 and some of the puts and takes that may.
That we should be considering.
In the context of all these dynamics.
But as Dave said, we don't really talk about 'twenty, three but some of the dynamics Ryan I mean, the way we look at it. So we certainly will have a much bigger sales force we have a lot of new reps that we've added at the end of the year that will help drive that customer growth that we've already seen even this year with the.
<unk>.
We do have new products as you mentioned that we will have more of an impact in 'twenty three.
<unk> brand is doing extremely well.
In the surgical setting so.
That's an area that we focus on.
We're adding a lot of accounts, we've had double digit growth in accounts that will be available to us next year with that largest salesforce. So as Dave said the fundamentals of the base business. The core business is good.
What happens going forward, we will have to assess when we get more information on the competitive environment CMS decisions.
Great day.
Just last one for me and I'll hop back in queue.
As we think about cost next year Dave.
I know there was some onetime dynamics this quarter that.
Lifted up out there but.
Assuming that that comes back out.
How do you kind of expect to manage cost and into the next year and do you feel like you need a belt tightening just.
Scaling back obviously the facility in <unk>.
Massachusetts is there any other belt tightening that consider to allow you to kind of keep up some of those margins.
Yes, Ryan it's a great question I mean, obviously as Gary said were not ready to talk about 'twenty three yet, but we have.
Have made a lot of investment in 'twenty. Two as you said there is some kind of transitory costs in there that are not going to repeat but.
We will obviously be prudent in our investment profile based on what the outlook is for revenue. We're really as we both said the fundamentals of the business are still here Theres strong again, we're continuing to build the customer base, we want to make sure that we have the resources.
And infrastructure to capture that demand when it returns that are stronger.
It's just that it is today.
Thanks, guys.
Thanks Ryan.
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Okay.
Okay.
We are currently showing no remaining questions at this time.
That does conclude our conference for today, Thank you very much.
Great.
Thank you.
Okay.
Yeah.
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