Organogenesis Holdings Inc. Q1 2023 Earnings Call
Welcome, ladies and gentlemen to the first quarter of fiscal year 2023 earnings Conference call.
Oregon know Jennifer.
<unk> Inc. At this time, all participants have been placed in a listen only mode. Please note that this conference call is being recorded.
And that the recording will be available on the company's website for replay shortly.
And exchange Commission, including item one a risk factors of the company's most recent annual report and it subsequently filed quarterly reports.
You are cautioned not to place undue reliance upon any forward looking statements, which speak only as of the date made although it may voluntarily do so from time to time the company undertakes no commitment to update or revise the forward looking statements.
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 GAAP Legion.
We generally refer to these as non-GAAP financial measures reconciliation of those non-GAAP financial measures.
The most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.
I would now like to turn the call over to Mr. Gary S. Gill Hany, SR, Organogenesis Holdings, President and Chief Executive Officer. Please go ahead Sir.
Thank you operator, and welcome everyone to organic Genesis Holdings first quarter fiscal year 2023 earnings conference call.
I'm joined on the call today by Dave Francesco Our Chief Financial Officer.
Let me start with a brief agenda of what we will cover during our prepared remarks.
I'll begin with an overview of our first quarter revenue results and an update on our key operating developments in recent months.
Dave will then provide you with an in depth review of our first quarter financial results, our balance sheet financial condition at quarter end and are.
2023 financial guidance, which we updated in today's press release, and then we'll open it up for questions.
Beginning with a review of our revenue results for Q1, we reported net revenue of $107 6 million for the first quarter, an increase of 11% year over year, which was driven by a 12% increase in the sale of our advanced wound care products.
Actually offset by a 4% decrease in the sales for our surgical and sports medicine products.
First quarter sales net revenue results came in above the high end of the guidance range, we provided on our fourth quarter earnings call.
Both our advanced wound care.
While sales results in both our primary product groupings exceeding the high end of expectations in Q1 sales of advanced wound care products drove the majority of the upside in the quarter.
Advanced wound care product sales were driven by better than expected demand for both our <unk> and non pure pipe products in the first quarter fuel.
Fueled by the continued strong demand for our well established high differentiation.
<unk> brand and the strength in adoption and utilization of our amniotic technology.
Importantly, our advanced wound care product sales results exceeded the high end of our expectations in both the hospital outpatient setting and the physician office.
Q1.
As expected, we leveraged our diversified portfolio and leadership position in wound care centers and physician offices across the U S to deliver strong growth in Q1.
Specifically, excluding dermagraph, our team delivered high teens growth year over year and the number of accounts served in the hospital outpatient setting and high single digit growth in customer accounts in the physician office setting. Additionally, we delivered more than 20% growth in units so year over year in Q1.
And we are proud of the team's execution in Q1 and believe our ability to deliver results above the high end of our guidance range represents another clear illustration that we have the right strategy to maximize our competitive position as a leader in the advanced wound care market.
Yes.
Turning to an update on our operational progress in recent months we continue.
Recently completed the construction and validation activities for our new corporate Logistics center at our headquarters in Canton, Massachusetts.
As well as the completion of additional manufacturing space at our nearby facilities in Norway.
We continue to focus on and invest in expanding our manufacturing capacity overall for our product portfolio and our pipeline products and specifically for developing manufacturing capacity for our demographic and transit products that were previously manufactured in California.
To that end, we are working with development firms to assess building additional manufacturing space at our manufacturing headquarters here in Massachusetts and in parallel we're looking at alternatives for suitable existing manufacturing space within the region. As previously communicated we expect to have a definitive plan by the end of the third quarter.
Our ongoing phase III clinical trial for renewable for the treatment of knee osteoarthritis continues to progress as planned.
The efficacy phase of the trial will be completed in July and we expect that <unk> achieved the last patient last visit milestone and completion of the trial by the end of the year.
In recent months, we've also made progress with respect to our second phase III study for review.
On track with our plan to launch the operational aspects of the second phase III trial by the end of the second quarter of this year with first patient enrolled is expected to be at the end of the third quarter.
We also have a scheduled meeting with the FDA in June to discuss the CMC requirements for the <unk>.
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We expect to have a subsequent discussion with the FDA regarding the clinical data requirements for the BLA and as previously discussed we will propose at the current phase III trial combined with the published 200 patient RCT as valid scientific evidence and sufficient for our BLA approval.
As a reminder, our plan is based on our belief that moving forward with a second trial as soon as we hear from the FDA will enable us to leverage the major operational advantages of continuing with the current active investigator site. This plan essentially gives us more options and our regulatory strategy.
Lastly, I'd like to share a few noteworthy items related to our continued efforts to engage with clinicians and expand the awareness of our product portfolio clinical efficacy and the value that the health care system.
I'm going to Genesis was a significant contributor at the recent symposium on advanced wound care Conference RSA WC. This.
This is the this is the primary clinical and scientific conference for advanced wound care, we presented eight posters and abstracts with one chosen as the top poster in the clinical research category. We also sponsored symposium on and workshops to further educate clinicians on genesis portfolio of products.
This week.
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For Health conference in Boston on Comparative effectiveness research study on the use of <unk> cell therapy and wound.
This continues our significant investment in demonstrating the clinical and economic effectiveness of our products with real world evidence.
We're also pleased with the recent publication of a pure play anthem appropriate clinical study in the wound management and prevention Journal. This.
This exciting pilot study evaluating the effectiveness of pure play antimicrobial wound.
File burden and biofilm contamination were detected by an advanced imaging diagnostics device.
With that let me turn the call over to Dave discuss the financial results. Thank.
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.
Net revenue from surgical and sports medicine products for the first quarter was $6 7 million down 4%.
Gross profit for the first quarter was $81 million or approximately 75, 3% of net revenue compared to 74, 2% last year.
Change in gross margin was driven primarily by increased sales volume and advanced wound care products as well as a shift in product mix through our higher gross margin products.
Operating expenses for the first quarter was $85 million compared to $72 2 million last year, an increase of $12 9 million or 18%.
The increase in operating expenses in the first quarter was driven by a $10 three.
<unk> 3 million or 16% increase in selling general and administrative expenses and a $2 6 million or 30% increase in research and development costs compared to the prior year period.
First quarter GAAP operating expenses included certain non operating items totaling $1 9 million.
Just think of employee severance and benefits as well as other exit costs associated with certain restructuring activities. This compares to zero point $3 million of restructuring related charges in the prior year.
On February three 2023, we committed to a plan to restructure our workforce to improve productivity and enhanced profitability.
The reduction enforced reduced our head count by 71 employees or approximately 7% of all employees.
The company incurred a total charge of $1 8 million in the first quarter in connection with the restructuring.
Excluding restructuring items and noncash intangible amortization of $1 $2 million in both periods non-GAAP operating expenses for the first quarter increased $11 million or 16% year over year.
Driven by higher clinical study related spending in support of our renew studies.
A 14% growth in SG&A expenses with roughly half of that increase related to the timing of our national sales meeting.
Note that we have a detailed reconciliation.
<unk> of these nonoperating in noncash items in today's earnings press release.
Our non-GAAP operating expense growth expectations for 2023 reflects mid single digit growth year over year.
Distant with our strategy to prioritize investments in areas that enhance our foundation for future growth.
Operating loss for the first quarter was $4 million compared to an operating loss of <unk> $1 million last year, an increase in loss of $3 9 million.
Total other expense for the first quarter, which was <unk> 6 million compared to zero point $7 million last year, a decrease of <unk> 1 million or 12%.
Net loss for the first quarter was $3 million compared to 0.9 last year, an increase in loss of $2 1 million adjusted.
Adjusted EBITDA for the first quarter was $3 8 million or three 5% of net revenue compared to $5 million or five 2% of net revenue last year.
We provided a full reconciliation of our adjusted EBITDA results in our earnings press release.
Turning to our balance sheet as of March 31, 2023, the company had $89 4 million in cash cash equivalents and restricted cash of $69 9 million of debt.
This compared to a $103 3 million in cash cash equivalents restricted cash and $78 million and debt obligations as of December 31 2022.
We also have up to $125 million of available borrowings on our revolving credit facility as of March 31 2023.
Turning to a review of our 2023 financial guidance, which we updated in our press release this afternoon.
For the 12 months ending December 31, 2023, the company now expects net revenue of between $454 million and $466 million, representing a year over year increase in the range of 1% to 3% as compared to net revenue of $450 9 million for the year ended December 31, 2000 point of view this.
Compared to our prior guidance of $450 million to 462 million.
The 2023 net revenue guidance range assumes net revenue from advanced wound care products between $424 million and $432 million, representing a year over year change in the range of flat to up 2%.
This compares to our prior guidance of $420 million to $428 million.
Net revenue from surgical and sports medicine products between 30 million and $34 million, representing an increase of 5% to 19% year over year. This range is unchanged versus our prior guidance assumptions.
In terms of our profitability guidance for 2023, the company expects to generate GAAP net income of between $3 2 million and $10 9 million adjusted net income between $8 four and $16 1 million.
We also expect EBITDA of between $28 million and $38 7 million and adjusted EBITDA of $38 1 million and $48 8 million.
In addition to our formal guidance for 2023, we are providing some consideration for modeling purposes for the fiscal year 2023, we now expect sales of our pure play products will decrease in the range of 11% to 20% year over year compared to our prior guidance range, which assumed a decrease of 18% to 26% year over year.
Sales of our non pure applied products will increase at the midpoint of the range approximately 22% year over year compared to our prior guidance, which assumes growth of approximately 28% year over year.
Gross margins of approximately 75, 5% to 76, 5%.
Total GAAP operating expenses will increase approximately 2% to 3% year over year and total non-GAAP operating expenses will increase approximately 4% to 5% year over year.
Our 2023, non-GAAP operating expenses exclude noncash intangible amortization of approximately $2 9 million in estimated restructuring charges of $2 2 million.
Total interest and other expenses of approximately $3 3 million compared to our prior guidance of $5 2 million.
We now expect our full year GAAP tax rate in the range of 42, 5% to 61% at the high end and low end of our guidance range respectively.
This compares to our prior guidance, which assumed a full year GAAP tax rate of 29% we.
We continue to expect non-GAAP tax rate on adjustments of 27%.
We now expect noncash depreciation of approximately $11 5 million compared to prior guidance of $6 4 million and our estimates for non cash stock comp expense and weighted average diluted shares are unchanged at approximately $7 9 million.
Approximately 132 million shares. We also expect full year 2023, capex to be approximately $25 million to $30 million and finally, we expect the second quarter revenue in the range of approximately $113 million to $117 million, representing a decline of approximately 4% to 7% year over year.
With that I'll turn the call back over to Gary for some closing remarks.
Thank you Dave.
Our updated guidance reflects our expectation for measured growth in sales of advanced wound care products in 2023, driven primarily by the impact of key products in the physician office setting is working through the national launches recently published Asps.
We also expect to navigate the continuing challenges in the office in 2023 due to customer uncertainty surrounding cms's potential change for Medicare payments under the physician fee schedule for advanced wound care treatments.
We applaud CMS are pushing forward with your initiatives that publish asps for skin substitutes this year.
We now have the opportunity to introduce a differentiated clinically proven solutions to more patients nationwide and this represents a significant long term growth opportunity for organogenesis.
Importantly, executing on our strategy. This year is expected to result in growing our share of patients treated with advanced modalities again in 2023.
The emphasis on more patients being treated with advanced modalities is consistent with cms's efforts to reduce the burden on the health care system.
Rising costs may be attributable to untreated and properly treated wounds and resist healing and result in more serious complications such as amputation by.
By trading wounds with advanced modalities, we believe these complications can be avoided.
Treatment with advanced cell and tissue products that demonstrate clinical efficacy have the added benefit of improving patients' lives, while reducing overall cost to the healthcare system and greater awareness of these advanced technologies, among health care providers and patients should be a priority and can contribute to cms's efforts to reduce cost.
Continue to identify opportunities to expand our commercial focus beyond spinal fusion for ankle with emphasis on increasing awareness of our product solutions for surgical wounds in soft tissue procedures will continue to optimize our independent agency relationships and look for further progress in our ongoing pilot programs, which are testing.
Essentially commercial strategies, including using small direct teams of specialists and certain procedure area.
We also look forward to strong market adoption of our pure play <unk> Z product as it enters full commercialization this year.
As Dave mentioned earlier, we are focused on prudent investment in our highest priority operating expense areas, which we expect will help drive strong adjusted EBITDA generation in 2023.
We're confident that we have the right strategy to continue to build on our leadership position in the office setting as well as in wound care centers across the United States.
And our competitive position in the surgical and 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.
We will continue to be a leader in advanced wound care, while improving our competitive position in surgical sports medicine markets by launching highly innovative highly efficacious products as we deliver on our mission to provide integrated healing solutions at substantially improve outcomes and lower the overall cost of care.
Thank you operator.
Thank you Sir.
If you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
A speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment.
And our first question will come from the line of Ryan Zimmerman with <unk>. Your line is open. Please go ahead.
Good evening, thanks for taking the questions and congrats on the nice start to the year, Gary and Dave.
Thank you Ryan talk about.
Guidance for for a moment here if I could start there I have a number of questions.
Maybe take the latitude to ask a few tonight.
Just number one on guidance so relative to our expectations you guys.
<unk> had a nice beat about $12 million versus what we were looking for and I think your guidance at the time and so relative to that guidance is going up about $4 million for the remainder of the year help.
Help us understand what youre seeing in the market, that's maybe holding you back or if it's conservatism.
Just wanted to understand kind of your philosophy in thinking around the guidance.
Yes, Brian This is Dave I mean, obviously, we are really pleased with the first quarter. It was a great performance in commercial teams did a really nice job.
That's a great start to the year no question about it I think we do see some nice things in the operating environment that but it's early days. It's just early in the year for us to pass through that entire amount is what we're thinking.
This is Gary Ryan.
Okay.
I'm sorry, the physician fee schedule is coming out of it in July and we're just being cautious.
We want to make sure it is.
Any disruption of market confusion or anything we're not expecting anything specific but sometimes there can be confusion.
Help our customers get through that and we're just waiting maybe cautiously to see how that all plays out anymore.
That's very helpful, Gary and to that point.
We obviously watch the physician fee schedule closely to see kind of how CMS is.
Posture and then what there what the rates are.
Past few quarters has been a little bit challenging in terms of competitive dynamics as a result of the lack of clarity on that schedule.
I think if I recall, you were expecting that to moderate.
In the second quarter.
And again I. Appreciate you may not know what CMS will do but as of right now what's your current thinking around some of the dynamics that have.
Our forces that have taken advantage of the lack of transparency on that fee schedule.
Yeah.
So we're seeing actually better on a regional basis, some improvement and some of that is just the effectiveness of our national launches working through some of the challenges that we've seen in the past.
There's still a lot of products that are not on published list.
It's about 135 Cte piece about 58 of them had been published though there's still a lot that have not been but regionally. We're seeing some improvement that's what we're expecting to continue.
We're expecting to continue to see improvement throughout the year.
And that's kind of what's built into our guidance.
Very helpful.
I'm going to keep rolling here, if I may.
Just a couple of other questions remain number one Gary I think I heard you high teens growth in the outpatient setting what was the growth in the physician office I think you called it out.
Yes, it was high single digits.
An account.
Okay.
And so to that point.
Having seen some of your competitors reported already.
What's your sense of the market just broadly.
In the advanced wound care space.
What are you expecting in terms of patient volumes in the door. What are you seeing this quarter and is it are we seeing any improvement.
Finally speaking in the market.
Well, we clearly have seen improvement in the first quarter in fact, I think that a normal seasonality that we've typically seen from Q4 to Q1 is significantly less.
We're seeing 20% unit growth across our portfolio virtually all of our major brands.
The brand forward and.
Even though.
Our <unk> product, which we're seeing a lot better performance than we expected.
Which is why we changed the guidance a little bit on I'm sure a plot so.
Yes definitely.
More patients being treated or units being applied we're adding more accounts.
And we even expected so.
Definitely see some positive trends, we'd like to see those trends continue again, we're being a little cautious perhaps if we want to see that trend continue and we think we think it will.
But right now there's definitely some strength in the market.
Okay.
Last one for me and I'll hop back in queue, but.
On renew.
A lot of good milestones come in.
And in conjunction with that I guess I wanted to ask if the FDA says you don't have to do a phase three second phase III trial excuse me.
Do you have a sense of what you would save in costs.
For that.
And as I think about that in the context of say your adjusted EBITDA guidance.
That.
Proved to be upside to that guidance.
Maybe what are you factoring in there for a for the cost of a secondary trial that begins later this year.
Hello, David.
Yes, I mean, obviously Ryan that the trials are significant if we're able to to only go with the two.
So far in skip that second phase III it would be a significant change in the financial profile going forward over the next couple of years.
Okay, but just to be clear Dave right now those costs are built into your model and that's assumed in the guidance.
It is having.
Going forward, we expect that yes of course, it's a it's a couple of years.
Higher amount, we talked about the first patient enrollment at the end of Q3, so its backend loaded that cost in this year, so more of that would spill into 2004.
Yeah makes sense okay.
Sure.
Okay.
Thank you all right. Thanks, Brian .
Thank you Lee you're currently showing no remaining questions in the queue that does conclude today's conference. Thank you for participating.
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