Organogenesis Holdings Inc. Q3 FY2025 Earnings Call

Welcome, ladies and gentlemen, to the Third Quarter 2025 Earnings Conference Call of Organogenesis Holdings, Inc. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A, Risk Factors of the company's most recent annual report and its 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 the generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these 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. Gillheeney, Senior, Organogenesis Holdings President, Chief Executive Officer and Chair of the Board. Please go ahead, sir.

Thank you, operator, and welcome, everyone, to Organogenesis Holdings Third Quarter 2025 Earnings Conference Call. I'm joined on the call today by Dave Francisco, our Chief Financial Officer. Let me start with a brief agenda of what we'll cover during our prepared remarks. I'll begin with an overview of our third quarter revenue results and provide an update on key operating and strategic developments in recent months. Dave will then provide you with an in-depth review of our third quarter financial results, our balance sheet, and financial condition at quarter end, as well as our financial guidance for 2025, which we updated in our press release this afternoon. Then we'll open up the call for questions. Let me begin with a review of our revenue results for Q3. We delivered sales results that exceeded the high end of our guidance range outlined in our second quarter call, driven primarily by better-than-expected growth in sales of our Advanced Wound Care products, which increased 31% year-over-year. Sales of our Surgical & Sports Medicine products also performed well, increasing 25% year-over-year in the third quarter. The record revenue performance we delivered in the third quarter reflects our team's strong execution and commitment to our strategy to build upon our deep customer relationships and promoting access to existing and recently launched products despite continued aggressive pricing strategies from our competitors. On October 31, CMS announced the final Medicare physician fee schedule for the calendar year 2026. As mentioned in our last quarter's earnings call, this is a watershed moment for the industry and the most impactful development in more than a decade. We congratulate CMS on taking this significant step in payment reform and are pleased CMS finalized skin substitute classifications based on FDA regulatory status and a per square centimeter payment methodology in both the physician office and hospital outpatient settings. We are pleased that CMS has recognized the clinical differentiation of PMA products and has taken steps toward higher payment and expanded access for PMA products. We remain committed to working with CMS and other stakeholders to further expand access to these life-saving technologies as well as incentivize investment and innovation in the space and achieve long-term market stability. We believe this new policy will address abuse under the current system and the resulting rapid escalation in Medicare spending while ensuring a much-needed consistent payment approach across sites of care. With more than 40 years in regenerative medicine and a diverse evidence-based portfolio with technologies in each FDA category, we believe we are best positioned in the skin substitute market for 2026 and beyond, and we'll continue to be a leader in the space with highly innovative, highly efficacious products that deliver on our mission of advancing healing and recovery beyond our customers' expectations. Before turning the call over to David, I wanted to provide some updates on key clinical and regulatory developments in recent months. Beginning with an update on our ReNu program. On September 25, we announced that the second Phase III trial of ReNu did not achieve statistical significance for its primary endpoint despite demonstrating a numerical improvement in baseline pain reduction that exceeded the results of the first Phase III trial. Baseline pain reduction at 6 months for ReNu was negative 6.9 for the second Phase III study compared to negative 6.0 in the first Phase III study. Additionally, ReNu results from the second Phase III study continue to demonstrate a favorable safety profile. Given the first Phase III trial achieved statistically significant reduction in pain compared to saline and the second Phase III trial demonstrated a numerical improvement in baseline pain reduction that exceeded the results of the first Phase III trial, we believe these combined results support the potential approval of ReNu for pain symptoms associated with knee osteoarthritis included in those patients classified as the most severe. ReNu has been studied in 3 large RCTs of more than 1,300 patients combined. Organogenesis believes the totality of this data is compelling evidence for the FDA to review in a biologic license application. Additionally, the FDA granted ReNu Regenerative Medicine Advanced Therapy, or RMAT designation based on ReNu demonstrating the potential to treat an unmet need in symptomatic knee osteoarthritis, a serious condition affecting more than 30 million Americans. We have a meeting scheduled for December 12 with the FDA to discuss our submission, including using the combined efficacy analysis from both Phase III studies to support a BLA approval. We believe gathering robust and comprehensive clinical and real-world evidence is an essential component of developing a competitive product portfolio and driving further penetration in the markets where we compete. While we did not meet the November 1 submission deadline for new data for LCD coverage consideration in 2026 for PuraPly AM, for DFU and Affinity or VLU, these studies and analyses continue, and we intend to submit for coverage once they're published. We remain confident in our strong competitive position in the skin substitute market heading into next year. We have substantial advantages, including strong brand equity, deep customer relationships, and importantly, 3 highly innovative, highly efficacious commercialized products on the covered list if the LCDs take effect as scheduled on January 1, 2026, specifically our Apligraf product for DFU and VLU and our Affinity and NuShield products for DFU. We have strongly advocated for CMS to implement an integrated coverage and payment policy for the skin substitute market. We believe they have taken the right steps to address rapidly escalating Medicare costs while ensuring patient access to the most appropriate clinically effective technologies. We believe these changes present an enormous opportunity for Organogenesis to serve more patients and, importantly, will be positive for the long-term health of the wound care market. Beyond 2026, we expect to advance our competitive position as we leverage our development engine fueling new innovation, capacity to launch and reintroduce products, including our Dermagraft product, which is already covered for DFU and VLU under the LCDs. Strategic investments in expanding the body of clinical evidence supporting our technologies and a transformational opportunity with ReNu. With that, I'd like to 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. Net product revenue for the third quarter was $150.5 million, up 31% year-over-year and up 49% sequentially. As Gary mentioned, these results came in above the high end of our expectations we provided on our Q2 call, which called for total revenue in the range of $130 million to $145 million. Our Advanced Wound Care net product revenue for the third quarter was $141.5 million, up 31%. As Gary mentioned, the commercial team executed well in the period, building upon the momentum that we experienced towards the end of Q2 that we discussed on our last earnings call. Net product revenue from Surgical & Sports Medicine products for the third quarter was $9 million, up 25%, primarily due to an increase across the PuraPly family of products. Our total revenue results for the third quarter included $0.4 million of grant income related to the grant issued from the Rhode Island Life Sciences Hub, offsetting our employee-related costs in our Smithfield facility. This compares to no impact in the prior year period, and we continue to expect grant income to be immaterial in 2025. Gross profit for the third quarter was $114.2 million or 76% of net product revenue, compared to 77% last year. The change in gross profit was due primarily to a shift in product mix. Operating expenses for the third quarter were $130.1 million compared to $108.9 million last year, an increase of $21.2 million or 19%. Excluding cost of goods sold of $36.3 million for the third quarter and $26.8 million last year, our non-GAAP operating expenses for the third quarter were $93.9 million compared to $82.1 million last year, an increase of $11.7 million or 14%. The year-over-year change in operating expenses, excluding cost of goods sold, was driven by a $7.9 million or 11% increase in SG&A expenses, a $2.9 million or 28% increase in research and development expenses, and a $0.9 million write-down of certain nonrecurring expenses. Operating income for the third quarter was $20.7 million compared to an operating income of $6.2 million last year, an increase of $14.5 million. Excluding noncash amortization and certain nonrecurring costs in both periods, our non-GAAP operating income was $23 million compared to $7.1 million income last year. GAAP net income for the third quarter was $21.6 million compared to a net income of $12.3 million last year, an increase of $9.2 million. Net income to common for the third quarter was $14.5 million compared to a net income of $12.3 million last year. As a reminder, net income to common includes the impacts of the cumulative dividend, the noncash accretion to redemption value on our convertible preferred stock and undistributed earnings allocated to participating redeemable convertible preferred stock. Adjusted EBITDA for the third quarter was $30.1 million compared to adjusted EBITDA of $13.4 million last year. Now turning to the balance sheet. As of September 30, 2025, the company had $64.4 million in cash, cash equivalents, and restricted cash with no outstanding debt obligations, compared to $136.2 million in cash, cash equivalents, and restricted cash with no outstanding debt obligations as of December 31, 2024. On October 31, 2025, we amended our credit agreement to better align with the underlying fundamentals of our business. The amended credit agreement now provides access to up to $75 million of future borrowings. We believe we are well capitalized with our cash on hand and other components of working capital as of September 30, 2025, and available under our revolving credit facility and net cash flows from product sales. Now turning to a review of our 2025 revenue guidance, which we updated in this afternoon's press release. For the 12 months ended December 31, 2025, the company now expects net revenue of between $500 million and $525 million, representing a year-over-year increase in the range of 4% to 9%. The 2025 net revenue guidance range now assumes net revenue from Advanced Wound Care products of between $470 million and $490 million, representing a year-over-year increase in the range of 4% to 8%. Net revenue from Surgical & Sports Medicine products between $30 million and $35 million, representing a year-over-year increase in the range of 6% to 23%. With respect to our profitability and EBITDA guidance, the company now expects GAAP net income in the range of $8.6 million to net income of $25.4 million compared to a range of a net loss of $6.4 million to net income of $16.4 million previously. EBITDA in the range of $19.1 million to $41.9 million compared to $6.2 million to $37 million previously. Non-GAAP adjusted net income in the range of $21.5 million to $38.4 million compared to $5.5 million to $28.3 million previously, and adjusted EBITDA in the range of $45.5 million to $68.3 million compared to $31.1 million to $61.9 million previously. In addition to our formal financial guidance for 2025, we are providing some considerations for our modeling purposes. Our profitability guidance for 2025 now assumes gross margins in the range of approximately 74% to 76%. GAAP operating expenses, excluding cost of goods sold, up 1% to 2% year-over-year. Excluding noncash intangible amortization of approximately $3.4 million, the nonrecurring FDA payment related to our renewed BLA filing of $4.6 million, and the $9.8 million write-down of assets and restructuring activities in the first 9 months of 2025, our total non-GAAP operating expenses will increase in the range of 3% to 5% year-over-year. With that, I'll turn the call over to the operator to open up the call for your questions.

We will take our first question from Ross Osborn from Cantor Fitzgerald.

Congrats on the strong quarter. So starting off, I would be curious to hear how your conversations are going with the clinical community in terms of when you're expecting physician behavior to change following the PFS. Is that December this year, earlier? Any thoughts there?

Yes, this is Gary. We're beginning to observe some changes in behavior, with clinicians increasingly selecting products from the approved LCD list. Some contracts are also starting to be processed to bring those products in while removing the others. We're noticing the initial administrative changes taking place now. Although we haven't seen a shift in sales behavior yet, the groundwork is being laid for a change in utilization moving forward, influenced by the physician fee schedule.

Okay. Got it. And then looking to next year, what can you do from a company standpoint to help generate awareness regarding your products as incremental volume opens up as many players that were selling higher ASP products won't be able to operate in the market?

We have strong brand equity for our products, and we emphasize the clinical efficacy of our portfolio. We will continue to communicate this message. It is particularly relevant in today's environment as well as in the upcoming year. We believe that having products that are suitable for use and can receive reimbursement will be significant. The clinical evidence supporting those products will enhance their utilization. These are the key messages we will consistently promote to ensure the market is aware of our offerings, the clinical evidence backing them, and the probability of reimbursement due to being on the LCD and having appropriate data if questioned.

Our next question comes from Ryan Zimmerman from BTIG.

This is Izzy, on for Ryan. So I wanted to start or continue, I guess, on the physician fee schedule for 2026. I was curious how you think the new rates might impact margins as we start to think about our models for next year?

It's a bit early to discuss 2026, but I want to touch on the revenue profile and margins. While we aren't providing financial guidance today, I'm glad you brought this up because there are some important changes in the market for 2026 that deserve attention. Firstly, with the LCD being implemented, over 200 products will no longer be covered for DFUs and VLUs starting January 1, 2026. As Gary mentioned, we have three commercialized products that are covered by the LCD, with an additional one, Dermagraft, returning in the second half of 2027. The covered products include NuShield, a dehydrated amnion for DFUs, Affinity, a living amnion for DFUs, and Apligraf, the only PMA-approved product for both DFUs and VLUs. We are pleased to have these on the covered list. Furthermore, financial incentives in the market will significantly decrease, helping to level the playing field, which we've been advocating for. In addition to our brand equity, efficacy, and service, we are well-positioned for competition in 2026 with various FDA classifications addressing multiple indications. Our commercial team has successfully adapted to the dynamic market environment, as seen over the past couple of years, especially in this last quarter. While there are no expected implications for the surgical business next year, our strong position in the hospital outpatient setting should drive growth, especially since reimbursement there is now unbundled. Despite new entrants in the market, we anticipate regaining some of the share we've lost recently. However, the market has expanded, which may contract due to overuse. Overall, we expect ASPs across the market to decline, including ours. Notably, Apligraf, being the only PMA-approved product for both DFUs and VLUs, will be reimbursed at significantly higher rates than in previous years. We see numerous growth drivers next year and anticipate improvements in margin and cash flow.

That's very helpful. And to your point about ASPs coming down, I was curious if you were surprised at all by the final rate ending up in that $127 range? Or is that kind of where you were expecting?

Yes, we initially believed that the finalized rate would align with what was proposed in the rule. However, we didn't expect CMS to change that rate at this time. They have acknowledged the clinical differentiation and associated resource costs of PMAs, indicating that reimbursement for PMAs will likely exceed that of 510(k)s and 361 over time. Therefore, we anticipate a shift, particularly with the separation of PMAs. Once the market adjusts to this change, CMS might reassess whether the rate of $127 for the 361s and 510(k)s is appropriate or if it has negatively impacted care. We think they want to observe the outcomes before adjusting. That's why we believe they maintained the rate at $127, although the proposed rule was $125, which made us expect a final rate around that figure or close to it.

Got it. That's helpful. And then just shifting focus over to ReNu. I know you're meeting with the FDA in December, but I was curious if the initial approval time lines that you had called out before, I believe it was late 2026 or early 2027 are still on the table given the recent data readout.

Sure. So we still think there is an opportunity to still file and we'll be filing in a modular form in December if we have a successful meeting with the FDA. But I would guide to a 2-month delay as probably safe. It's possible we could stay on our current time line, but 2 months, I think, is reasonable based on where we are today in preparing for that December 12 meeting.

We are currently showing no remaining questions in the queue at this time. That concludes our conference for today. Thank you for your participation. You may now disconnect.