Q3 2023 Organogenesis Holdings Inc Earnings Call
Please standby.
Welcome, Ladies and gentlemen that third quarter 2023 earnings Conference call for Genesis Holdings, 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.
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.
The risks and uncertainties 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 our 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 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 GAAP.
We generally refer to these as non-GAAP financial measures reconciliations of those non-GAAP financial measures to 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. <unk>, SR, Organogenesis Holdings, President and Chief Executive Officer, and chair of the Board. Please go ahead Sir.
Yeah.
Thank you operator, and welcome everyone to organic Genesis Holdings third quarter fiscal year 2023 earnings conference call.
I'm joined on the call today by day Francisco, our Chief Financial Officer.
Let me start with a brief agenda of what we'll cover during our prepared remarks I'll begin with an overview of our third quarter revenue results and an update key operating and strategic development.
Dave will then provide you with an in depth review of our third quarter financial results our balance sheet.
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Ryan as well.
Guidance for 2023, which we reintroduced in our press release.
Afternoon.
I will share some closing thoughts before we open the call for your questions.
Let me start by reviewing our revenue for Q3.
We reported net revenue of $108 $5 million for the third quarter down 7% year over year.
Sales of our advanced wound care products decreased 7% and sales of our surgical and sports medicine products decreased 2%.
Prior year.
Q3 sales reflects the significant business disruption, we experienced as a result of the local coverage determination or LCD published by three Medicare administrative contractors on August start, which we discussed on our second quarter conference call.
Specifically after a strong start to the quarter and despite delivering strong year over year growth through August our sales trends were materially impacted during the month of September.
The impact of this business disruption was most acutely experience in the regions of the U S where these max operate cute.
Q3 sales.
LCD impacted Mac regions declined in the high teens year over year, when we experienced a modest decline in the non LCD impacted regions primarily in the opposite.
We are proud of the team's execution and commitment to our mission not just the commercial team in the field, but throughout the organization. As these teams worked tirelessly following the August 3rd announcements engaging with all relevant parties in advance of the stated effective date of the LTV the convinced the macs to withdraw the LCD.
Protecting our customers.
<unk> that we serve.
As announced on September 28, all three macs with through the final LCD for skin substitute graph elevate amdocs tissue based product for the treatment of diabetic foot ulcers and venous leg ulcers that was scheduled to take effect on August.
First.
We applaud the Max in CMS for capital considering them as shareholders and stakeholders concerns regarding the LCD potential negative impact and putting the needs of patients first and coming to this decision.
We thank all of the stakeholders, including physicians patient advocacy groups and clinical and industry associations are concerned about the negative health outcomes, including a long treatment of serious infection, which often lead to amputation and associated higher mortality, but for their support and advocated for the withdrawal of the LCD.
We also think the stakeholders concerned about the treatment disparity in health and equity impact of the LCD.
On the populations with higher rates of diabetes and other comorbidities.
Clearly we are pleased with the result.
All of the LCD, but that said the overall business disruption in the marketplace, including significant confusion and uncertainty among customers as well as aggressive in certain circumstances questionable competitive response <unk>.
Fact that our capacity to engage with new and existing customers affecting the adoption and utilization of our product and ultimately affecting our third quarter sales results.
While we are pleased with the LCD withdrawal, we continue to navigate through the challenging environment created by the proposed adoption.
We have reintroduced our 2020 financial guidance, which reflects the impact of the business disruption in the third quarter as well as our recovery activities throughout the year.
The commercial team is actively re engaging with our customers to bring our products back to the healing algorithms formulary. These efforts are progressing well. However, our share of voice has been focused on clarifying the misinformation in the market, where many of our resources on delivering our clinical messaging and expanding our customer base.
Turning to an update on our operational progress in recent months, we continue to focus on and invest in expanding manufacturing capacity overall for our portfolio on pipeline as well as to drive long term efficiencies enhance our optionality for the future.
Continue to work with outside advisors to identify and evaluate potential options that are currently.
Currently targeting the final plan here by the end of calendar year 2023.
Our ongoing phase III clinical trial for a review for the treatment of knee osteoarthritis continues to progress as planned we continue to expect to achieve the last patient last visit milestone by the end of the year, allowing for analysis of the data early next year.
We've also made progress with respect to our second phase III study for renewed we enrolled the first patient in September as expected and as previously.
As discussed we expect to have a subsequent discussion with the FDA regarding the clinical data requirements for the BLA and we intend to propose the current phase III trial combined with published 200 patient RCT as valid scientific evidence sufficient FERC BLA approval.
With that let me turn the call over to Dave.
Thanks, 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.
As Gary mentioned net revenue for the third quarter was $108 5 million down 7%, our advanced wound care net revenue for the third quarter was $101 4 million down, 7% and net revenue from surgical and sports medicine products for the third quarter was $7 2 million down 2%.
Gross profit for the third quarter was $82 7 million or approximately 76, 2% of net revenue compared to 77, 6% last year.
The decrease in gross profit and margin resulted primarily from a decrease in pricing for certain of our products as well as the shift in product mix compared to the prior year period.
Operating expenses for the third quarter was $74 7 million compared to $88 9 million last year, a decrease of $14 2 million or 16%.
The decrease in operating expenses in the third quarter was driven by a $15 1 million or 19% decrease in selling general and administrative expenses offset partially by a <unk> 9 million or 9% increase in research and development costs compared to the prior year period.
Third quarter GAAP operating expenses included <unk> 1 million of restructuring related.
Activities compared to <unk> 6 million in the prior year as well as $1 6 million of legal costs and compensation costs related to our efforts to convince the Max to withdraw the LCD compared to no such costs in the third quarter of 2022.
Third quarter 2022, GAAP operating expenses also included certain two non operating items $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.
Zero point $6 million of cancellation fees incurred in connection with the Companys decision deposits manufacturing facility construction project.
Excluding these items and noncash intangible amortization of $1 $2 million in both periods non-GAAP operating expenses for the third quarter decreased $10 5 million or 13%.
The material reduction in our non-GAAP operating expenses is related to the timing of expenses year over year and a result of our proactive strategy to manage costs in light of the challenging operating environment. We.
We have implemented additional cost reduction initiatives in recent weeks that further mitigate the impact to profitability from the lower fourth quarter revenue outlook.
Operating income for the third quarter was $8 1 million compared to $1 8 million last year, an increase of $6 3 million.
Total other expenses net for the third quarter, <unk> 4 million compared to <unk> 6 million last year, a decrease of <unk> 2 million and.
Net income for the third quarter was $3 2 million compared to zero point $2 million last year, an increase of $3 million.
Adjusted net income for the third quarter was $5 3 million compared to $5 1 million last year, an increase of <unk> 2 million. As a reminder, adjusted net income is defined as GAAP net income adjusted to exclude the effect of amortization and restructuring charges and the resulting income taxes on those items adjust.
Adjusted EBITDA for the third quarter was $16 million or 14, 7% of net revenue compared to $11 6 million or nine 9% of net revenue last year. We believe the operating leverage delivered in the third quarter is notable in light of the year over year decline in revenue. We have provided a full reconciliation of our adjusted EBITDA results in our earnings release.
Turning to the balance sheet as of September 32023, the company had $98 8 million in cash cash equivalents and restricted cash and $67 6 million in debt obligations compared to $103 3 million in cash cash equivalents and restricted cash and $70 8 million in debt obligations as of December 31, 2012.
Two we are also up to $125 million of available borrowings on our revolving credit facility as of September 32023.
Turning to review of our 2023 financial guidance, which we reintroduced in our press released this afternoon for the 12 months ending December 31, 2023. The company now expects net revenue of between $433 million and $446 million, representing a year over year decrease in the range of 1% to 4% as compared to net.
Revenue of $450 9 million for the year ended December 31 2022.
The 2023 net revenue guidance range assumes net revenue from advanced wound care products of between $406 million and $418 million.
Presenting a year over year decrease in the range of 1% to 4%.
Net revenue from surgical and sports medicine products between 27 million and $29 million, representing a year over year decrease in the range of flat to down 6%.
In terms of profitability guidance for 2023, the company expects to generate GAAP net income of between four and $9 million and adjusted net income of between $11 million and $17 million.
We also expect EBITDA between $26 million and $37 million and adjusted EBITDA of between 40 million and $51 million.
In addition to our formal financial guidance for 2023, we are providing some considerations for modeling purposes for the fiscal year 2023, and we now expect the midpoint of our total revenue range for 2023 now assumes sales of pure play products to decrease approximately 23% year over year and sales of our non core byproducts will increase approximately 21%.
Yes.
Our profitability guidance now assumes gross margins of approximately 76 to 76, 5%.
Total GAAP operating expenses will decrease approximately 1% to 2% year over year and total non-GAAP operating expenses will be roughly flat year over year.
Our 2023 non-GAAP operating expenses include non cash intangible amortization of approximately $4 9 million estimated restructuring charges of $3 4 million and $1 6 million of other non operating items related to our efforts to convince the Max to withdraw the LCD.
Total interest and other expenses of approximately $2 2 million GAAP tax rate in the range of 51% to 53% at the high end and low end of our guidance range, respectively, and we continue to expect non-GAAP tax rate on adjustments of 27%.
We now expect noncash depreciation of approximately $9 9 million in non cash stock comp expense of approximately $9 million and weighted average diluted shares of approximately $133 million.
We also expect full year 2020, capex to be approximately 25 million to $30 million.
With that I'll turn the call back over to Gary for some closing remarks.
Thanks, Dave.
When we open the call to your questions I wanted to share some additional thoughts on our near term outlook.
While underlying assumptions supporting our updated guidance for 2023.
The environment remains challenging as a result of the LCD haven't been announced despite their withdrawal on September 28.
While our sales trends in October have improved.
Lumber, we're experiencing significant business disruptions driven by customer confusion and uncertainty as well as aggressive and in certain circumstances question about competitive response.
Our fourth quarter guidance assumes improvement as we move through the quarter, but we expect our sales reps to be spending more time servicing existing customers and regaining lost customers versus cultivating new customer adoptions. This is the primary driver of the lower revenue expectations reflected in our updated guidance.
Compared to what our prior guidance assumed for the fourth quarter of 2023.
While the second half growth trajectory for argon agenda that has been impacted by the LCD related customer confusion. We believe this is largely transitory. We continue to actively engage with customers that have multiple commercial support programs underway with targeted strategy to regain lost accounts.
Listing customer relationships and.
And as we build our customer base back in the fourth quarter. We are building momentum as we close out 2023 looking ahead to 2024, we will launch new products across both advanced wound care and surgical sports medicine market and we will continue to be a leader in this space with highly innovative highly efficacious products that deliver on our mission to provide.
Integrated healing solutions that substantially improve outcomes, while lowering the overall cost of care.
With that I'll turn the call over to the operator.
On the call up for questions.
Thank you Sir.
If you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
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And our first question will come from.
Brian Zimmerman with BTG. Please go ahead.
Hey, thanks for taking the questions.
Juggling a few calls Tonight, so I apologize if this was covered earlier Gary.
But cms's final rule came out recently for for 2024.
Did it have much chain, despite all the angst and speculation this year in terms of how CMS thinks about skin substitutes.
So forth.
Just curious kind of how we should be thinking about the market dynamics given.
The continuation of our high cost low cost bundled structure.
And really just.
Your view of excuse me of whether at some point there is going to be a change in.
Payment models in this area of medicine.
Yes sure. Thanks for the question.
Brian So you are correct the 2024.
Yes.
Such a feat and hospital outpatient.
Reimbursement really didn't have much change at all.
I think going forward that.
They will be some changes, particularly in the office setting I think the dynamics of the market right now.
I think maybe the impetus behind some of the LCD changes that were rescinded.
It was to bring discipline to the market and stability to the market and I think that's necessary. So I do think over time, there will be a change in the office I think.
In an appropriate change I think could be very positive quite frankly, so we've we've advocated.
Katy for an ASP plus six model, which we think would bring some stability quickly to the market.
But I think going forward. We're also looking at more creative bundling.
Scenarios that I think could actually be better for patient care and more stable for the industry and really bring some distinction between the products and the overall efficacy of those products. So I think you will see something in the next two to three years I think there will be structural changes, particularly in the office.
And H O PD.
May be a response.
To whatever changes in the office so there aren't.
Incentives too.
Push more patients back into the office excuse me back into the hospital, which is a higher cost setting.
They need to coordinate in my opinion, those two models and.
Think they will and I think that'll happen in the next two to three years.
Very helpful.
The LCD has been pulled I think was a win for you guys.
As you noted it didn't make a whole lot of sense.
But there is confusion in the market and so just help us understand beyond fourth quarter of this year, how you face that.
What does that continue.
How are you kind of preparing to inform the market.
Given that there aren't these.
<unk> is happening from the outset is.
Yeah, Great question and as I mentioned in the prepared remarks, a lot of our share of voice in those affected Mac areas and even outside of.
The impacted Max.
There's a lot of misinformation and we're spending a lot of our share of voice on correcting that misinformation and making sure our customers do understand that our products are reimbursed and getting them back on formulary.
It's particularly an H O PD.
It's a more efficient model that they will quickly take you off their formulary, if theres a reimbursement change unexpected change, particularly when you think about the treatment algorithm with a patient.
It's typically not one application so you need to address that from a reimbursement perspective early.
So that happened very quickly in <unk> and we experienced it getting it back on formulary is a longer process through the back and other.
Processes that they have so we're in that process and we are addressing each and every one of those accounts in the office area.
Yes.
Handling those pretty much one on one unfortunately, we have really strong share of voice and brand loyalty in those accounts and we're moving them back to organogenesis accounts very quickly, but it is it's a fourth quarter effort as I mentioned.
We are seeing a nice trend.
September was was the worst month, we've seen improvements in October even through the month of October we're seeing improvements in November and we expect to have a majority of those accounts back with us at the end of the year, which positions us really well for growth in 2024.
Okay. Thanks for taking my questions.
Sure.
Hi.
Thank you.
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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.
Thank you.
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