Q4 2022 Organogenesis Holdings Inc Earnings Call

Speaker 2: Please stand by. Welcome ladies and gentlemen to the fourth quarter and fiscal year 2022 earnings conference call for Organogenesis Holdings Inc. At this time all participants have been placed in listen only mode.

Speaker 2: 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.

Speaker 2: 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.

Speaker 2: except as required by applicable securities laws.

Speaker 2: This call will also include references to certain financial measures that are not calculated in accordance with the Generally Accepted Accounting Principles, or GAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to be the most comparable measures calculated and presented in accordance with GAAP.

Speaker 2: 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. Gilhiney Sr., Organogenesis Holdings President and Chief Executive Officer. Please go ahead, sir. Thank you, operator and thank you for your time.

Speaker 3: and welcome everyone to Organogenesis Holdings' fourth quarter in fiscal year 2022 Earnings Conference Call. I'm joined on the call today by Dave Francisco, our Chief Financial Officer.

Speaker 3: Let me start with a brief agenda of what we'll cover during our prepared remarks.

Speaker 3: I will begin with an overview of our fourth quarter revenue results and the update on some of our key operating developments in the recent months.

Speaker 3: Dave will then provide you with an in-depth review of our fourth quarter financial results, our balance sheet and financial condition at year end, and our 2023 financial guidance, which we introduced today with our press release. I'll then share a few thoughts on our outlook for 2023 before opening the call.

Speaker 3: a decrease, a 10% decrease in our sale of advanced wound care products and a 6% decrease in sale of our surgical and sports medicine products.

Speaker 3: Fourth quarter sales results came in above the low end of the guidance range we provided on our third quarter earnings call. And moreover, sales of both our advanced wound care and surgical sports medicine products exceeded the low end of the range with their respective guidance.

Speaker 3: That said, the composition of our Q4 revenue by product was different than what we guided.

Speaker 3: Specifically, the low end of our guidance range assumed a 12% decline.

Speaker 3: in total net sales, driven by mid-single digit growth in sales of pure applied products, and nearly a 30% decline in sales of non-pure applied products.

Speaker 3: As we outlined on our Q3 call, we expected our sales in the physician office setting to be impacted by overall market disruption driven by reimbursement uncertainty related to CMS publishing ASPs for skin substitute products this year and competitive pressure from smaller amniotic players.

Speaker 3: And as expected, we did in fact see a continuation of the challenging operating environment in the physician office in Q4, which was the primary contributor to the 10% decline year over year in sales of non-pure applied products.

Speaker 3: However, we were pleased that these sales resulted were above the high end of our guidance range.

Speaker 3: We are proud of the team's execution in Q4 and believe our ability to deliver results in line with our guidance represents another clear illustration that we have the right strategy to maximize our competitive position as a leader in the advanced WOMK market.

Speaker 3: We navigated a challenging operating environment with strong execution by our commercial team who leveraged the powerful combination of our comprehensive portfolio, our expanding breadth of customers across multiple physician specialties in sites of care, and a well-established brand loyalty.

Speaker 3: While our net sales decline year over year, there were a number of bright spots in our Q4 results which will help support growth in 2023.

Speaker 3: excluding renew, new cell and dermograph, our team delivered low double-digit growth in the number of accounts that we serve in both the hospital-owned patient setting and the physician office setting, compared to the prior period.

Speaker 3: We delivered double digit growth and sales of advanced wound care products in the hospital outpatient setting, which partially offset the impact of the headwinds that we saw in the office setting. And we're pleased by the encouraging market response to our new product introductions.

Speaker 3: Turning to an update of our operational progress in recent months, first, we were pleased to announce in a separate press release this afternoon the achievement of an important milestone in notable progress in our ongoing Phase III clinical trial of RENU for the treatment of knee osteoarthritis.

Speaker 3: Specifically, we completed the interim analysis of 50% of the patients enrolled who had reached the FDA approved six-month primary efficacy endpoint.

Speaker 3: This interim analysis of patient safety and effectiveness was reviewed by the Independent Study Data Monitoring Committee, or the DMC, who assessed study performance relative to the primary objectives in statistical power of the study.

Speaker 3: By way of reminder, the primary efficacy endpoint is reduction in pain at six months from the start of the study comparing the renew and control groups. A significant clinical reduction in pain while maintaining or improving patient function is necessary for FDA approval.

Speaker 3: Based on DMC's review, we were instructed to continue the study as planned.

Speaker 3: This is a very positive news, and we're encouraged by the results of the DMC's review of the data from the first 50% of the 474 required patients enrolled in the trial, which supports our belief that the results of the original study protocol are on track.

Speaker 3: This morning's press release also announced that our clinical team delivered on our stated milestone of completing patient enrollment by the end of 2022. And in fact, as a result of the strong momentum in patient enrollment towards the end of the year, we enrolled more than 500 patients in this Phase III clinical study. The team's hard work in activating additional sites and implementing additional sites.

Speaker 3: amendment to the FDA in Q4 of last year and responded to requests for additional information in late February , and we expect to hear from the FDA in coming weeks and remain on track with our plan to launch a second Phase III study by the end of the second quarter of this year.

Speaker 3: with the first patient enrolled expected to be at the end of the third quarter of this year.

Speaker 3: first patient enrolled expected to be at the end of the third quarter of this year. As a reminder,

Speaker 3: Our plan is based on the belief that moving forward as soon as we hear from the FDA will enable us to leverage the major operational advantages of continuing with the current active investigator sites.

Speaker 3: This plan essentially gives us more options in our regulatory strategy.

Speaker 3: And as we've discussed previously, we expect to present our strategy in a meeting with the FDA and to propose that the completed 200 patient RCT and the first Phase III study with more than 500 patients together represent valid scientific evidence of renews safety and effectiveness for the treatment of knee osteoarthritis.

Speaker 3: In addition to a notable clinical progress in recent months, we've also continued to evaluate potential alternatives after the decision to pause construction of our Canton, Massachusetts, and the

Speaker 3: Manufacturing Facility last fall.

Speaker 3: Recall that this project was put on hold in response to material increases in the expected investment for this facility due to inflation and materials and construction costs in recent years.

Speaker 3: Specifically, the last estimated project investment represented a 40% increase from the original budget two years ago.

Speaker 3: While this decision is not expected to impact our ability to meet the markets demand for our existing commercialized products or our ability to achieve our target of greater than 80 percent gross margins in the future, the building was intended to be used to manufacture multiple products, including demograph and translate. And we remain focused on bringing these products back to the market.

Speaker 3: as soon as possible and expect to have a definitive plan in place by the end of the third quarter of this year.

Speaker 3: Lastly, I'd like to share a few thoughts on the virtual CMSkin substitute town hall conducted on January 18, which I previewed on our Q3 earnings call.

Speaker 3: The event was organized as an opportunity for interested parties to present and respond to four specific questions related to changes in payment and terminology of skin substitute products under the Physician Fees schedule.

Speaker 3: Well, I'm going to, Genesis, participate in value of the opportunity to share our feedback and responses to CMS's questions during the five minutes a lot to each presenter.

Speaker 3: And while we applaud CMS for engaging with key constituents during the town hall, we believe a longer discussion of this wide-ranging, complicated, important initiative is warranted.

Speaker 3: And it's our current understanding that CMS will not be formally engaging with key constituents or providing updates in advance of their annual proposed update to the physician fee schedule in July . However, we plan to continue our vigorous efforts to engage with key constituents, including CMS on this topic in coming months.

Speaker 4: With that, let me turn the call over to Dave. Thank you, Gary. I'll begin with a review of our fourth quarter financial results, and unless otherwise specified all growth rates referenced during my prepare remarks are on a year of your basis.

Speaker 4: Net revenue for the fourth quarter of 2022 was 115.5 million down 10%. Our advanced wound care net revenue for the fourth quarter of 2022 was 108.8 million down 10%. And lastly net revenue from Circle and Sports Medicine products for the fourth quarter of 2022 was 6.7 million.

Speaker 4: down 6% with net revenue from Purify products for the fourth quarter 2022 was 56.8 million

Speaker 4: Gross profit for the fourth motor of 2022 is $88.4 million or approximately $76.5% of net revenue compared to $74.5% last year.

Speaker 4: The change in gross margin was driven primarily by changes in product mix and normalized fixed cost absorption as compared to the prior year period, which was impacted by our lohoia restructuring activities.

Speaker 4: Operating expenses for the 4-quarter of 2022 were 79.7 million compared to 75.5 million last year, an increase of 4.2 or 6%. The increase in operating expenses in the 4th quarter of 2022 was driven by a 3.1 million or 38% increase in research and development costs.

Speaker 4: and a $1 million or 2% increase in selling, general, and administrative expenses compared to the prior year of period.

Speaker 4: Fourth quarter 2022 GAAP operating expenses include certain non-operating items totaling $0.8 million consisting of employee retention and benefits as well as other exit costs associated with the company's restructuring activities.

Speaker 4: This compares to $1.8 million of restructuring-related charges in the prior year.

Speaker 4: Excluding these non-operating items and non-cash intangible amortization of $1.2 million in both periods

Speaker 4: non-GAAP operating expenses for the fourth quarter of 2022 increased 7% year-over-year, driven by higher clinical study- related spending in support of our renewed studies and missed single-digit growth in SG&A expenses.

Speaker 4: Now we have a detailed reconciliation of these non-operating and non-cash items in today's earnings press release. Our non-gap operating expenses for growth in 2022 reflects our strategy to prioritize investments in areas that enhance our foundation for future growth.

Speaker 4: Specifically of roughly 37 million increase in non-GAP-OPEX in 2022, roughly 70% was invested in sales and marketing, R&D and clinical initiatives, including expanding our commercial team, supporting new product development and funding critical studies.

Speaker 4: The balance of the increase in non-GAP operating expenses this year was largely focused on continuing to enhance infrastructure to support our growth objectives going forward.

Speaker 4: Operating income for the fourth quarter of 2022 was $8.7 million, compared to operating income of $19.8 million last year, a decrease of $11 million.

Speaker 4: Total other expense for the fourth quarter of 2022 was zero in the fourth quarter of 2022, compared to 0.9 million last year, a decrease of 0.9 million.

Speaker 4: The change in total other expense was primarily related to a $0.5 million gain on capitalized interest related to our decision to pause the Canton manufacturing project.

Speaker 4: The remaining year of year decline in total other expense for the fourth quarter of 2022 is attributable to lower interest expense on outstanding borrowings.

Speaker 4: Net income for the fourth quarter of 2022 was $7.5 million compared to $51 million last year, a decrease of $43.5 million.

Speaker 4: As a reminder, net income for the fourth quarter of 2021 included a benefit of 32 million in income taxes, recognized, resulting from the release of the valuation allowance, previously recorded against the full amount of our net U.S. deferred taxes. Tax assets. As adjusted in the bid off of the fourth quarter of 2022 was four-

Speaker 4: 2022 the company had 103.3 million in cash and cash equivalents and restricted cash and 70.8 million in debt obligations.

Speaker 4: This compared to 114.5 million cash, cash equivalents, and restricted cash, and 73.6 million in debt obligations, of which 0.2 million were finance lease obligations as of December 31, 2021.

Speaker 4: We also have up to 125 million of available borrowings on our revolving credit facility as of December 31st, 2022.

Speaker 4: Turning now to our review of our 2023 financial guidance which we introduced in our press release this afternoon, for the 12 months ending December 31, 2023, the company expects net revenue between 450 million and 462 million, representing a year-over-year change in the range of flat to an increase of approximately 2%.

Speaker 4: as compared to net revenue of $450.9 million for the year ended December 31, 2022.

Speaker 4: The 2023 net revenue guidance range assumes net revenue from advanced moon care products of between 428 million, 420 million and 428 million, representing a year of a change of down 1% to up 1%. As compared to net revenue of 422.2 million, for the year ended December 31st, 2022.

Speaker 4: Net revenue from surgical and sports medicine products between 30 million and 34 million, representing an increase of 5% to 19% year-of-year, as compared to net revenue of 28.7 million for the year-end of December 31st, 2022.

Speaker 4: And NET revenue from the sale of our Purify products of between 180 million and 200 million representing a decrease of approximately 26% to 18% year-of-year has compared to NET revenue of 242.7 million for the year ended December 31st, 2022.

Speaker 4: In terms of our profitability guidance for 2022, the company expects to generate gap net income between $7.2 and $13.9 million, adjusted net income between $12.3 and $19 million.

Speaker 4: have a DAW between 27 million and 36.1 million and adjust the DAW between 36.5 million and 46 million.

Speaker 4: In addition to our formal financial guidance for 2022, we are providing some considerations for modeling purposes.

Speaker 4: For the fiscal year 2023, we expect sales of our non-pure applied product, which include our amniotic PMA and other products, will increase the midpoint of the range of approximately 28% year-to-year in 2023.

Speaker 4: gross margins of approximately 75.7 to 76.5 percent.

Speaker 4: Total gap operating expenses will increase 1 to 2% year of year, and total non-gap operating expenses will increase approximately 2% and 3% respectively year of year.

Speaker 4: Our 2023 non-GAP operating expenses include non-CASH, Tangeable, and Tangeable Emeritization of approximately 4.99 million and estimated restructuring charges of 2.1 million.

Speaker 4: Total interest in other expenses of approximately 5.2 million compared to 2 million last year.

Speaker 4: and non-GAAP tax rates of approximately 29% and 27% respectively.

Speaker 4: Non-cash depreciation of $6.4 million and non-cash stock comp expense of approximately $7.8 million and weighted average saluted shares of approximately $133 million.

Speaker 4: We also expect full year 2023 tap ex to be approximately 25 million to 30 million. And finally, I'd like to remind investors that our business experience is significant quarterly seasonality each year, with Q1 and Q4 representing our smallest and largest revenue quarters respectively. Over the last five years, our first quarter revenues have ranged between approximately 25 million to 30 million.

Speaker 4: I'll turn the call back over to Gary for some closing remarks.

Speaker 3: Thanks, David. 2022 was a challenging year, but we are proud of the team's commitment to our long-term growth strategies, and we expect that to continue this year. Although it may not be readily apparent based on the net revenue growth reflected in our 2023 guidance, our guidance reflects our expectations for measured growth.

Speaker 3: in sales of advanced wound care products in 2023, driven primarily by the impact of key products in the physician office setting, working through nationwide launches with recently published ASPs.

Speaker 3: We also expect to navigate the continued challenges in the office setting in 2023 due to the competitive noise from smallest in substitute players operating outside the published ASP framework. And customer uncertainty surrounding CMS's potential changes for Medicare payments under a position fee schedule for its advanced room care treatment.

Speaker 3: We applaud CMS for pushing forward with their initiative to publish the ASPs for skin substitutes this year.

Speaker 3: We now have the opportunity to introduce our differentiated and clinically proven solutions to patients nationwide. This represents a significant long-term growth opportunity for organogenesis. And while sales of our advanced wound care products in the office setting will be impacted in 2023, we expect to deliver stable growth

Speaker 3: in sales of our advanced womb care products in the womb care centers and hospital outpatient centers. We expect growth in the number of new and active customers. We expect growth in the number of units sold and stronger adoption of our new products entering full commercialization. And importantly, executing on our strategy this year is expected to result in growing our

Speaker 3: of this business following the FDA enforcement deadline in May of 2021. We continue to identify opportunities to expand our commercial focus beyond spine fusion and foot knuckle with an emphasis on increasing awareness of our product solutions for surgical wounds and soft tissue procedures and will continue to optimize our independent agency relationships.

Speaker 3: continue to look further for further progress in our ongoing pilot programs, which were testing potential commercial strategies, including using small direct teams of specialists in certain procedure areas. We also look forward to strong market adoption of our new product pure apply MZ as it enters full commercialization this year.

Speaker 3: And as Dave mentioned earlier, we're focused on prudent investment in our highest priority operating expense areas, which we expect will help drive strong adjusted Ibadad generation in 2023, despite a more measured net revenue growth profile this year.

Speaker 3: We have confidence that we have the right strategy to continue to build on our leadership position in the office setting as well as in Wom Kesson as across the United States and to strengthen our competitive position in the surgical sports medicine market in 2023.

Speaker 3: Importantly, we continue to believe that the long-term growth opportunity for organogenesis is very compelling and we remain confident in our long-term target of sustainable low, double-digit growth on a normalized basis.

Speaker 3: importantly, we continue to believe that the long-term growth opportunity for organogenesis is very compelling and we remain confident in our long-term target of sustainable low double-digit growth on a normalized basis. Our business fundamentals are strong.

Speaker 3: We will continue to be a leader in advanced wound care while improving our competitive position in surgical sports medicine and burn markets by launching highly innovative, highly efficacious products as we deliver on our mission to provide integrated healing solutions that substantially improve patient outcomes and reduce the overall cost of care.

Speaker 3: Operator, turn it back to you.

Speaker 2: Thank you, sir. If you'd like to ask a question, please signal by pressing star 11 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.

Speaker 2: If you'd like to ask additional questions, we invite you to add yourself to the queue again by pressing star 11. And our first question will come from Ryan Zimmerman from BTIG.

Speaker 4: All right, thanks for taking the questions, Gary and Dave, appreciate all the color. I'm going to ask a number of questions if that's okay. I think there might be some capacity here on the call. And if there's others in queue, certainly I'll hop back. But I want to start with guidance for a bit here and just talk about...

Speaker 4: your assumptions underpinning the guidance from a macro perspective. I can appreciate the competitive noise, but I'm curious if you assume market growth for 2023, and if so, what is that market growth specifically? And then I want to ask also about, if you can elaborate on why Purify is seen such...

Speaker 4: drastic declines in usage for 23 because the pricing into 23 was held fairly flat, I think, as of the last update from CMS. Then I'll ask some other questions if I could.

Speaker 3: So, I'll start Dave, you can jump in. So, this clearly market growth in our 2023 guidance, as Dave mentioned, are non-purply products or expected to grow at the midpoint, 28 percent. And that's a reflection of all of the new accounts that we talked about.

Speaker 3: during the year and that I mentioned that we're expecting again in 2023. We have more active accounts. We have more units being sold both in the outpatient setting and in the physician office. So, significant opportunities for growth in the non-PURPLY products. Now, as it relates to PURPLY, PURPLY was published and will be published in the next year or so.

Speaker 3: in 2023 for the entire year, and that typically causes a pause. We actually seen that pause at the end of Q4, once the physician fee schedule dropped in mid-December, we seen a pause in the acquisition of PureApply XT.

Speaker 3: So now with that product published, we have that pause that we will overcome with the growth of the rest of our portfolio.

Speaker 3: once we get by this year, the comps going forward will be more relative.

Speaker 4: Yeah, absolutely, Gary. I think the only other thing on the growth perspective from 23 on the non-pure reply side of the house, we obviously brought in incremental sales reps throughout 2022. These guys came in around July and August time frame and really up to speed and ready to contribute in 23. Okay.

Speaker 5: And just, I want to ask one thing on peer reply while we're still on the topic. I did see a disclosure in the 10K as I was looking through it ahead of this call. As it relates to these rebates that may take effect from CMS to implement a rebate, is

Speaker 5: It calls up the fact that there may need to be refund amounts calculated for 2033. And I'm just wondering if you can elaborate on what that means, what you expect to potentially owe CMS if that does follow through.

Speaker 3: So I'll transfer it to Dave, but we don't know what that amount would be if any. So that's not something that's calculable at this point in time.

Speaker 4: But okay. Yeah, it's unclear at this point, right, and how that's going to play out. So, um, for an exciting respecter in the 10K. Yeah, that's correct. Okay.

Speaker 5: And then as far as, first off, on a more positive light, I think the clinical trial, you know, the internment analysis looks fantastic to be able to, you know, not have to up your power for that trial is really great.

Speaker 5: You elaborate a little bit, Gary, on kind of what the plan is going forward with CMS, your on track, you're seeking 90. But help us understand some of the outcomes here. So if...

Speaker 5: in conjunction with the phase three trial.

Speaker 5: phase 3 trial.

Speaker 5: What does the second trial potentially look like? Help us understand kind of timelines for when a NEOA indication could potentially be on market.

Speaker 3: Sure.

Speaker 3: If in fact our first Phase III trial with the 200 patient study was accepted, we would expect BLA approval in the first half of 2025.

Speaker 3: The answer your question if the second study is required, which we are initiating, our next submission or discussion rather with the FDA would be to use the first phase three trial and the interim analysis.

Speaker 3: of the second phase three trial. And if accepted, that would be a BLA approval in Q1 of 2026. If the second trial has to go all the way through the end for 100% efficacy data, we are looking at the second half of 2026 for BLA approval.

Speaker 5: Very helpful on that end. And then if I could squeeze a couple more in. Sure. You know, competitive pressures I think we're supposed to abate after the fourth quarter.

Speaker 5: CMS published a number of new products into the first quarter. Yet, you know, they are persisting into 2023 and you just help us understand kind of the line of sight and your current thinking around.

Speaker 5: publish a number of new products into the first quarter. Yet, you know, they are persisting into 2023. And, you know, just help us understand kind of the line of sight and your current thinking around what happens now.

Speaker 5: In terms of competitive pressure, do you think this gets better over one more quarter, the entirety of the year? Just curious to get your perspective there.

Speaker 3: Sure. So CMS did publish 41 additional products on the list. I believe they removed several, which has created some confusion. And I think just the whole process has created confusion, which is why we still expect to see some impact in the market clearly in the first quarter.

Speaker 3: Now, if CMS publishes the rest of those products, we would expect to see that competitive impact.

Speaker 3: start to get much better for us once that information is absorbed in the market. But one of the other trends that we're seeing is even with the competitive noise, we're starting to see some of the customers actually, even with those rebating programs out there, reverting back to some of our technology because perhaps they're not getting the results. So we're starting to see some improvement.

Speaker 3: in just recruiting those customers back. And as we launched on a national basis with Affinity and now XT, you have that competitive noise in accounts that we haven't been in with those products. We're starting to see some inroads a little earlier. So that tells me that, you know.

Speaker 3: clinicians are seeing the benefits of our products and perhaps not so much in some of the other products they're using on the dehydrated side.

Speaker 3: So we think it gets better Ryan we think it gets better because efficacy is going to win we think it gets better Because eventually some of these others will get published

Speaker 3: So, you know, the answer to your question, we think it improves, but right now we see it that the noise is the same and the confusion is the same. Though our trends in 2023 so far are encouraging.

Speaker 3: So, you know, to answer your question, we think it improves, but right now it's, we see it, the noise is the same and the confusion is the same, though our trends in 2023 so far are encouraging.

Speaker 5: That's helpful. And then, you know, and then politism, I'm bouncing around a little bit here. But the last question for me, and I'll hop back in queue, you know, given the guidance on the top line. You know, implied expenses are up modestly, but there's, I mean, they're essentially in line with kind of where your sales are.

Speaker 5: And I know some of these are non-cash. But that said, how are you thinking about your spend into 23? And what are your levers to control that and get a little bit more, you know, adjust The fats of the fat down, the intestine without the fat, healthy fat.

Speaker 4: Because it is going to be down year over year based on the guidance. Yeah, Ryan, I mean the one thing I would say is that obviously this is an environment where from our standpoint, we are looking at flatish top line absolutely and you can see there based on the prepare remarks. We also see a decline in gross margin which is primarily related to the mix shift out of pure applies. You might imagine that's fairly...

Speaker 4: profitable business there, franchise. So what we're trying to do is be prudent about the operating expense that we're investing back in. It's relatively minor. I think the levers we've got are, you know, we're digging in pretty deep to ensure that we're optimizing all the tools that we have and redeploying resources where they'll add the most value. So we're looking at all those different things.

Speaker 2: Thank you. We are currently showing no remaining questions.

Speaker 2: in the queue at this time, that does conclude our conference for today. Thank you for your participation.

Speaker 6: Thank you. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.

Speaker 1: Now we're making Corporate

Speaker 1: I I.

Speaker 1: Two.

Speaker 2: Welcome ladies and gentlemen to the fourth quarter and fiscal year 2022 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.

Speaker 2: materially from those indicated, including the risks and uncertainties described in the company's filing with the Securities and Exchange Commission, including I-1A, risk factors, of the company's most recent annual report and its subsequently filed quarterly reports.

Speaker 2: You are cautioned not to place undue reliance upon any forward-looking statement, 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 statement. Whether as a result of new information,

Speaker 2: 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 the generally accepted accounting principles or gaps. We generally refer to these as non- GAAP financial measures. Reconciliation of these non- GAAP financial measures to be the most compare-

Speaker 3: Thank you, operator, and welcome everyone to Organogenesis Holdings' fourth quarter and fiscal year 2022 earnings conference call. I'm joined on the call today by Dave Francisco, our Chief Financial Officer.

Speaker 3: Let me start with a brief agenda of what we'll cover during our prepared remarks. I will begin with an overview of our fourth quarter revenue results and the update on some of our key operating developments in the recent months.

They will then provide you with an in-depth review of our fourth quarter financial results or balance sheet in financial condition at year end in our 2023 financial guidance, which we introduced today with our press release.

I'll then share a few thoughts on our outlook for 2023 before opening the call up for questions. So beginning with a review of our revenue for Q4, we reported, excuse me, net revenue of $115.5 million for the fourth quarter, a decrease of 10% year over year, which was driven by a decrease.

a 10% decrease in our sale of advanced wound care products, and a 6% decrease in sale of our surgical and sports medicine products.

Fourth quarter sales results came in above the low end of the guidance range we provided on our fourth, excuse me, on our third quarter earnings call and more over sales of both our advanced wound care and surgical sports medicine products exceeded the low end of the range for their respective guidance.

That said, the composition of our Q4 revenue by product was different than what we guided. Specifically, the low end of our guidance range assumed a 12% decline in total net sales, driven by mid-single digit growth in sales of PureApply products, and nearly a 30% decline in sales of non-PureApply products.

As we outlined on our Q3 call, we expected our sales in the physician office setting to be impacted by overall market disruption driven by a reimbursement uncertainty related to CMS publishing ASPs for skin substitute products this year in competitive pressure from smaller amniotic players. And as expected, we didn't fax the continuation of the Q3 call.

believe our ability to deliver results in line with our guidance represents another clear illustration that we have the right strategy to maximize our competitive position as a leader in the advanced WOMK market.

We navigated a challenging operating environment with strong execution by our commercial team who leveraged the powerful combination of our comprehensive portfolio, our expanding breadth of customers across multiple physician specialties in sites of care, and a well-established brand loyalty. While our net sales declined year over year, there were a number of bright spots.

We delivered double-digit growth in sales of advanced Wound care products in the hospital outpatient setting, which partially offset the impact of the headwinds that we saw in the office setting, and we're pleased by the encouraging market response to our new product introductions. Turning to an update of our operational progress in recent months.

First, we were pleased to announce in a separate press release this afternoon the achievement of an important milestone in notable progress in our ongoing Phase III clinical trial of renewed for the treatment of NIO osteoarthritis. Specifically, we completed the interim analysis of 50% of the patients enrolled who had reached the FDA approved six-month primary efficacy endpoint.

This interim analysis of patient safety and effectiveness was reviewed by the Independent Study Data Monitoring Committee, or the DMC, who assessed study performance relative to the primary objectives and statistical power of the study.

By way of reminder, the primary efficacy endpoint is reduction in pain at six months from the start of the study comparing the renew and control groups. A significant clinical reduction in pain while maintaining or improving patient function is necessary for FDA approval.

Based on DMC's review, we were instructed to continue the study as planned. This is a very positive news, and we're encouraged by the results of the DMC's review of the data from the first 50% of the 474 required patients enrolled in the trial, which supports our belief that the results of the original study protocol are on track. This morning's press release also announced that our clinical team delivered a...

to get us to this very important clinical milestone. In recent months, we've also made progress with respect to our efforts related to our second phase to study for Renew. We submitted an IND amendment to the FDA in Q4 last year and responded to request for additional information in the late February . Thank you very much.

And we expect to hear from the FDA in coming weeks and remain on track with our plan to launch a second phase three study by the end of the second quarter of this year with the first patient enrolled expected to be at the end of the third quarter of this year. As a reminder, our plan

is based on the belief that moving forward as soon as we hear from the FDA will enable us to leverage the major operational advantages of continuing with the current active investigator sites. This plan essentially gives us more options in our regulatory strategy. As we've discussed previously, we expect to present our strategy in a meeting with the FDA and to propose that the completed 200 patient RCT

and the first Phase III study with more than 500 patients together represent valid scientific evidence of renews safety and effectiveness for the treatment of knee osteoarthritis. In addition to a notable clinical progress in recent months, we've also continued to evaluate potential alternatives after the decision to pause construction of our Canton Massachusetts manufacturing facility last fall. Recall that this project was put on hold in response to material increases in the expected investment for this facility due to inflation and materials and construction costs in recent years.

Specifically, the last estimated project investment represented a 40% increase from the original budget two years ago. While this decision is not expected to impact our ability to meet the market's demand for our existing commercialized products or our ability to achieve our target of greater than 80% gross margins in the future, the building was intended to be used to manufacture multiple products.

including demograph and translate. And we remain focused on bringing these products back to the market as soon as possible and expect to have a definitive plan in place by the end of the third quarter of this year. Lastly, I'd like to share a few thoughts on the virtual CMSkin substitute town hall conducted on January 18th, which I previewed on our Q3 earnings call. The event was organized as an opportunity for interested parties to present and respond to four.

specific questions related to changes in payment and terminology of skin substitute product on products under the physician fee schedule. Organo-genesis participated in value of the opportunity to share our feedback and responses to CMS's questions during the five minutes a lot to each presenter.

And while we applaud CMS for engaging with key constituents during the Town Hall, we believe a longer discussion of this wide-ranging, complicated, important initiative is warranted.

And it's our current understanding that CMS will not be formally engaging with key constituents or providing updates in advance of their annual proposed update to the physician fee schedule in July . However, we plan to continue our vigorous efforts to engage with key constituents, including CMS on this topic in coming months.

With that, let me turn the call over to Dave. Thank you, Gary. I'll begin with a review of our fourth quarter financial results, and unless otherwise specified all growth rates referenced during my prepare remarks are on a year of your basis. Net revenue for the fourth quarter of 2022 was 115.5 million down 10%. Our advance wound care net revenue for the fourth quarter of 2022.

was 108.8 million down 10%. And lastly, net revenue from Certified Sports Medicine products for the fourth quarter of 2022 was 6.7 million down 6% with net revenue from Purify Products for the fourth quarter of 2022 was 56.8 million down 9%. Gross profit for the fourth quarter of 2022 was 88.4 million.

Operating expenses for the 4-quarter of 2022 were 79.7 million compared to 75.5 million last year, an increase of 4.2 or 6%. The increase in operating expenses in the 4th quarter of 2022 was driven by a 3.1 million or 38% increase in research and development costs.

and a $1 million or 2% increase in selling, general, and administrative expenses compared to the prior year of period. Fourth quarter, 2022 gap operating expenses include in certain non-operating items, totaling 0.8 million, consisting of on-point retention and benefits, as well as other exit costs associated with the company's restructuring activities.

This compares to 1.8 million of restructuring related charges in the prior year. Excluding these non-operating items and non-cash-contangible amortization of 1.2 million in both periods, non-gap operating expenses for the fourth quarter of 2022 increased 7% year of year, driven by higher clinical study related spending in support of our renew studies and mid-single digit growth and SGNA expenses.

Note, we have a detailed reconciliation of these non-operating and non-cash items in today's earnings press release. Our non-GAAP operating expenses for growth in 2022 reflects our strategy to prioritize investments in areas that enhance our foundation for future growth.

Specifically of the roughly 37 million increase in non-GAP OPEX in 2022, roughly 70% was invested in sales and marketing, R&D and clinical initiatives, including expanding our commercial team, supporting new product development, and funding critical studies.

The balance of the increase in non-GAP operating expenses this year was largely focused on continuing to enhance infrastructure to support our growth objectives going forward. Operating income for the fourth quarter of 2022 is $8.7 million compared to operating income of $19.8 million last year, a decrease of $11 million.

Total other expense for the fourth quarter of 2022 was zero in the fourth quarter of 2022 compared to 0.9 million last year, a decrease of 0.9 million. The change in total other expense was primarily related to a 0.5 million dollar gain on capitalized interest related to our decision to pause the Canton manufacturing project. The remaining year of year decline in total other expense for the fourth quarter of 2022.

is attributable to lower interest expense on outstanding borrowings. Net income for the fourth quarter of 2022 was $7.5 million compared to $51 million last year, a decrease of $43.5 million. As a reminder, net income for the fourth quarter of 2021 included a benefit of $32 million in income taxes recognized resulting from the release of the valuation allowance.

previously recorded against the full amount of our net U.S. deferred taxes. Tax assets. As a adjusted EBITDA for the fourth quarter of 2022 was 14.1 million or 12% of net revenue compared to 26.3 million or 21% of net revenue last year. We provided a full reconciliation of our adjusted EBITDA results in our earnings press release.

Turning it out of the balance sheet as of December 31st, 2022, the company had 103.3 million in cash and cash equivalents and restricted cash and 70.8 million in debt obligations.

This compared to 114.5 million cash, cash equivalents, and restricted cash, and 73.6 million in debt obligations, of which 0.2 million were finance lease obligations as of December 31, 2021.

We also have up to $125 million of available borrowings on our revolving credit facility as of December 31, 2022. Turning now to a review of our 2022 financial guidance, which we introduced in our press release this afternoon, for the 12 months ending December 31, 2023, the company expects to have a

Net revenue between 450 million and 462 million, representing a year-over-year change in the range of flat to an increase of approximately 2%, as compared to net revenue of 450.9 million for the year ended December 31st, 2022. The 2023 net revenue guidance range assumes net revenue from advanced moon care products of between 428 million, 420 million and 428 million, representing a year-over-change of down 1% to up 1%, as compared to net revenue of 422.2 million for the year ended December 31st, 2022.

Net revenue from surgical and sports medicine products between 30 million and 34 million, representing an increase of 5% to 19% year-of-year, as compared to net revenue of 28.7 million for the year-end of December 31st, 2022.

And NET revenue from the sale of our purify products of between 180 million and 200 million representing a decrease of approximately 26% to 18% year-of-year has compared to NET revenue of 242.7 million for the year ended December 31st, 2022.

In terms of our profitability guidance for 2022, the company expects to generate gap net income between 7.2 and 13.9 million, adjusted net income between 12.3 and 19 million.

have a DAW between 27 million and 36.1 million and adjust the DAW between 36.5 million and 46 million. In addition to our formal financial guidance for 2022, we are providing some considerations for modeling purposes.

For the fiscal year 2023, we expect sales of our non-peer-applied products, which include our amniotic, PMA, and other products, will increase at the midpoint of the range of approximately 28% year-over-year in 2023.

gross margins of approximately 75.7 to 76.5 percent. Total gap operating expenses will increase 1 to 2 percent year-of-year and total non-gap operating expenses will increase approximately 2 percent and 3 percent respectively year-of-year. Our 2023 non-gap operating expenses include non-cash and tangible amortization.

approximately 4.99 million and estimated restructuring charges of 2.1 million. Total interest in other expenses of approximately 5.2 million compared to 2 million last year and non-gap tax rates of approximately 29% and 27% respectively.

Non-cash depreciation of 6.4 million and non-cash stock comp expense of approximately 7.8 million and weighted average saluted shares of approximately 133 million.

We also expect full year 2023 tap ex to be approximately 25 million to 30 million. And finally, I'd like to remind investors that our business experience is significant quarterly seasonality each year, with Q1 and Q4 representing our smallest and largest revenue quarters respectively.

Over the last five years, our first quarter revenues have ranged between approximately 18% to 22% of annual revenue.

For 2023, we expect the first quarter revenue in the range of approximately 95 million to 100 million, or 21 to 22 percent, or full year 2023 net revenue.

With that, I'll turn the call back over to Gary for some closing remarks. Thanks, David. 2022 was a challenging year, but we are proud of the team's commitment to our long-term growth strategies, and we expect that to continue this year. Although it may not be readily apparent based on the net revenue growth reflected in our 2023 guidance, our guidance reflects our expectations for measured growth.

in sales of advanced WOMK products in 2023, driven primarily by the impact of key products in the physician office setting, working through nationwide launches with recently published ASPs. We also expect to navigate the continued challenges in the office setting in 2023 due to the competitive noise from small-as-can substitute players operating outside the published ASP framework.

And customer uncertainty surrounding CMS's potential changes for Medicare payments under the physician fee schedule for its advanced wound care treatment. We applaud CMS for pushing forward with their initiative to publish the ASPs for Skin Substitutes this year. We now have the opportunity to introduce our differentiated and clinically proven solutions to patients. Thank you.

nationwide. This represents a significant long-term growth opportunity for organogenesis. And while sales of our advanced wound care products in the office setting will be impacted in 2023, we expect to deliver stable growth in sales of our advanced wound care products in the wound care centers and hospital outpatient centers. We expect growth in the number of new and active customers. We expect growth in the number of units sold and stronger adoption of and we expect growth in the number of new and active customers.

of our strategic repositioning of this business following the FDA enforcement deadline in May of 2021. We continue to identify opportunities to expand our commercial focus beyond spine fusion and foot knuckle with an emphasis on increasing awareness of our product solutions for surgical wounds and soft tissue procedures and will continue to optimize our independent agency relationships.

and continue to look further for further progress in our ongoing pilot programs, which were testing potential commercial strategies, including using small direct teams of specialists in certain procedure areas. We also look forward to strong market adoption of our new product, Pure Apply, MZ.

as it enters full commercialization this year. And as Dave mentioned earlier, we're focused on prudent investment in our highest priority operating expense areas, which we expect will help drive strong adjusted Ibadad generation in 2023, despite a more measured net revenue growth profile this year. We have confidence that we have the right strategy.

to continue to build on our leadership position in the office setting as well as in Womkaya Center across the United States and to strengthen our competitive position in the surgical sports medicine market in 2023. Importantly, we continue to believe that the long-term growth opportunity for organogenesis is very compelling and we remain confident in our long-term target of sustainable low double-digit growth on a normalized basis.

Our business fundamentals are strong. We will continue to be a leader in advanced wound care while improving our competitive position in surgical sports medicine and burn markets by launching highly innovative, highly efficacious products as we deliver on our mission to provide integrated healing solutions that substantially improve patient outcomes and reduce the overall cost of care.

Operating will turn it back to you. Thank you, sir. If you'd like to ask a question, please signal by pressing star 11 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.

If you'd like to ask additional questions, we invite you to add yourself to the queue again by pressing star 11. And our first question will come from Ryan Zimmerman from BTIG. All right. Thanks for taking the questions. Thank you.

Gary and Dave appreciate all the color. I'm going to ask a number of questions if that's okay. I think there might be some capacity here on the call. And if there's others in queue, certainly I'll hop back. But I want to start with guidance for a bit here. And just talk about.

your assumptions underpinning the guidance from a macro perspective. I can appreciate the competitive noise, but I'm curious if you assume market growth for 2023 and if so, what is that market growth specifically? And then I want to ask also about if you can elaborate on why Purify is seeing such drastic declines in usage for 23.

because the pricing into 23 was held fairly flat, I think, as of the last update from CMS. And then I'll ask some other questions if I could.

So, I'll start Dave, you can jump in. So, this clearly market growth in our 2023 guidance, as Dave mentioned, are non-purply products are expected to grow at the midpoint at 28 percent. And that's a reflection of all of the new accounts that we talked about during the year and that I mentioned that we're expecting again in 2023. We have more active accounts. We have more units being sold both.

in the outpatient setting and in the physician office. So significant opportunities for growth in the non-pureply products. Now, as it relates to purply, purply was published and will be published in 2023 for the entire year and that typically causes a pause.

We actually seen that pause at the end of Q4. Once the physician fees schedule dropped in mid-December, we've seen a pause in the acquisition of pure apply X-T. So now with that product published, we have that pause that we will, you know,

overcome with the growth of the rest of our portfolio. And once we get by this year, the comp's going forward will be more relative.

Yeah, absolutely, Gary. I think the only other thing on the growth perspective from 23 on the non-pure reply side of the house, you know, we obviously brought in incremental sales reps throughout 2022. These guys came in around July and August time frame and, you know, really up to speed and ready to contribute in 23.

Okay. And just I want to ask one thing on PRPLY while we're still on the topic. I did see a disclosure in the 10K is looking through it ahead of this call. Is it related to these rebates that made take effect from CMS to implement a rebate?

It calls out the fact that there may be need to be refund amounts calculated for 23. And I'm just wondering if you can elaborate on what that means, what you expect to potentially owe to CMS if that does follow through. So I'll transfer to Dave, but we don't know what that amount would be if any. So that's not something that's calculable at this point in time.

But, okay. Yeah, it's unclear at this point, right, and how that's going to play out. So, it's exciting that risk factor in the 10K. Yeah, that's correct. Okay. And then, as far as, first off, on a more positive light, I think the clinical trial, you know, the internment analysis looks fantastic. That you haven't seen it before on the 30 minutes before the trial.

to be able to not have to up your power for that trial is really great. You elaborate a little bit, Gary, on kind of what the plan is going forward with CMS, your on track, you're seeking 90. But help us understand some of the outcomes here. So if you can't submit that 200 patient RCT in conjunction with the Phase 3 trial.

What does the second trial potentially look like? Help us understand kind of timelines for when a NEOA indication could potentially be on market.

Sure. So if in fact our phase, our first phase 3 trial with the 200 patient study was accepted, we would expect BLA approval in the first half of 2025. The answer to your question if the second study is required, which we are initiating.

Our next submission or discussion rather with the FDA would be to use the first phase three trial and the interim analysis of the second phase three trial. And if accepted that would be a BLA approval in Q1 of 2026.

If the second trial has to go all the way through the end for 100% efficacy data, we are looking at the second half of 2026 for BLA approval. Very helpful on that. And then if I could squeeze a couple more in, you know, competitive pressures, I think we're supposed to obey after the fourth quarter.

Do you think this gets better over one more quarter, the entirety of the year? Just curious to get your perspective there.

Sure. So CMS did publish 41 additional products on the list. I believe they've removed several, which has created some confusion. And I think just the whole process has created confusion, which is why we still see, expect to see some...

some impact in the market clearly in the first quarter. Now, if CMS publishes the rest of those products, we would expect to see that competitive impact start to get much better for us.

Once that information is absorbed in the market, but one of the other trends that we're seeing is even with the competitive noise, we're starting to see some of the customers actually, even with those rebating programs out there, reverting back to some of our technology, because perhaps they're not getting the results. So we're starting to see some improvement in just recruiting those customers back.

And as we launched on a national basis with affinity and now XT, you have that competitive noise and accounts that we haven't been in with those products, we're starting to see some inroads a little earlier. So that tells me that clinicians are seeing the benefits of our products and perhaps

not so much in some of the other products they're using on the dehydrated side. So we think it gets better Ryan, we think it gets better because efficacy is going to win, we think it gets better because eventually some of these others will get published. So you know the answer to your question, we think it improves but right now we see it that the noise is the same and the confusion is the same. Though our trends in 2023 so far are encouraging.

Right. That's helpful. And then, you know, in politism, I'm bouncing around a little bit here. The last question for me, and I'll hop back in queue, you know, given the guidance on the top line. In plot expenses are up modestly, but there's, I mean, there's essentially in line with kind of where your sales are.

And I know some of these are non-cash. But that said, how are you thinking about your spend into 23 and what are your levers to control that and get a little bit more adjusted EBITDA, net income, because it is going to be down year over year based on the guidance.

Yeah, Ryan, I mean the one thing I would say is that obviously this is an environment where from our standpoint, we are looking at flatish top line, absolutely. And you can see there based on the prepare remarks, we also see a decline in gross margin, which is primarily related to the mix shift out of pure applies. You might imagine that's a fairly profitable business there, franchise.

So what we're trying to do is be prudent about the operating expense that we're investing back in. It's relatively minor. I think the levers we've got are, you know, we're digging in pretty deep to ensure that we're optimizing all the tools that we have and redeploying resources where they'll add the most value. So, you know, we're looking at all those different things and we think that the investment profile that we've got going forward, again, to your point is consistent where we are around on the top line. happens.

I'm going to stop there and hop back in queue, but I appreciate you answering all my questions tonight. Thanks, Ryan. Thank you.

Thank you. 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.