Earnings Call Transcript - ORGO Q1 2021

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2021 Earnings Conference Call for 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 and quarterly reports. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made.

Gary Gillheeney, CEO

Thank you, Jeff, and welcome, everyone, to Organogenesis Holdings First Quarter 2021 Earnings Conference Call. I'm joined on the call today by Dave Francisco, our Chief Financial Officer. Let me start with a brief agenda of what we will cover today during our prepared remarks. I'll start with an overview of our revenue performance in the first quarter and a review of the key drivers of the impressive growth our team delivered despite the challenging operating environment. I'll then share a brief review of our operating highlights for the first quarter. After my opening remarks, Dave will provide you with a more in-depth review of our first quarter financial results and the formal guidance for 2021 that we updated in this afternoon's press release. And then we'll open the floor for questions. Beginning with a review of our first quarter revenue performance, I am pleased to report that we had another strong quarter in which we delivered solid financial results while making excellent progress advancing our strategic priorities. During the first quarter, we reported total revenue growth of 66% year-over-year, driven by 77% growth in our Advanced Wound Care products and 13% growth in the sales of our Surgical & Sports Medicine products compared to the prior year. Our better-than-expected growth in Q1 reflects a continuation of the key drivers of our growth strategy, including the benefits of our comprehensive portfolio of products, the investments that we've made to broaden our reach by expanding our sales force, and the strong execution of our commercial strategy, focusing on leveraging multiple channels, new product introductions, and brand loyalty.

David Francisco, CFO

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. As Gary mentioned, we were pleased with our strong start to 2021. Net revenue for the first quarter of 2021 was $102.6 million compared to $61.7 million last year, an increase of $40.6 million or 66%. Revenue from Advanced Wound Care products for the first quarter of 2021 was $90.7 million compared to revenue of $51.3 million last year, an increase of $39.4 million or 77%. Revenue from our Surgical & Sports Medicine products for the first quarter 2021 was $11.8 million compared to $10.4 million last year, an increase of $1.4 million or 13%. Finally, revenue from our PuraPly products for the first quarter of 2021 was $41.3 million compared to $32.5 million last year, an increase of $8.8 million or 27%. As of March 31, 2020, we had approximately 290 direct sales representatives compared to 300 at year-end 2020. We continue to expect to end 2020 with approximately 340 direct reps. Gross profit for the first quarter of 2021 was $77.1 million compared to $42.9 million last year, an increase of $34.1 million or 79%. Gross margin for the first quarter of 2021 was 75% of revenue compared to 70% last year, an increase of 560 basis points year-over-year.

Operator, Operator

And our first question will come from the line of Matt Miksic from Credit Suisse.

Matt Miksic, Analyst

Congratulations on a really strong quarter and revised outlook. I have a question about some of the top-line trends and a follow-up regarding the P&L. Gary, could you clarify where the raise comes from? It seems impressive and welcome, exceeding expectations. However, how are you able to raise your outlook significantly while also confirming that you won't be selling ReNu and NuCel? This is quite a dramatic shift from what we saw at the end of Q4. Could you walk us through the details again and explain what gives you the confidence to enhance your full-year guidance at this time?

Gary Gillheeney, CEO

Sure. So I think PuraPly is probably the most important change in our guidance. Obviously, PuraPly performed extremely well in Q1. And we had four product launches, as you know, right at the end of Q4. It was one of the areas that we focused on to see if those products would continue to grow as they did in Q1. All trends right now are very positive for all of the five products that we launched in 2020 before they came out late in the fourth quarter, and they're all growing extremely well. So that gives us a lot of confidence that the brand continues to grow and expand in multiple sites of care as we've discussed as part of our strategy. Our amnions continue to grow. Our goal is to have 2.5 times the capacity of Affinity this year versus 2020, and we're on our way to seeing that happen. So we're pretty comfortable right now that the amount of Affinity that we're able to produce will be meeting our goal of 2.5 times. We're seeing some positive trends in access, particularly at the end of the quarter and in May both in the outpatient setting for wound care and improving trends in the Surgical & Sports Medicine area as well. We've got a lot of positive tailwinds that are pushing us along, giving us more confidence in the broader part of our business, not just one aspect of our business. I don't know, Dave.

Matt Miksic, Analyst

That's super helpful.

David Francisco, CFO

No, I think you're absolutely right. The strength of PuraPly over the last two quarters really gives us the confidence to significantly increase that, along with the strength of the amnions. I agree.

Matt Miksic, Analyst

And just maybe before I jump to the P&L, just to clarify, I mean, I think you framed last quarter that your guidance didn't include the products that are at risk of enforcement or not really knowing which way the FDA would act. They've been clearer, I guess, in how they like the industry to think about commercialization post-May 31. Is that where we end here? Or what's the process going forward for these products? And then as I mentioned, I do have just one quick follow-up on the P&L, if I could.

Gary Gillheeney, CEO

No, I think you've interpreted it correctly. I think it ends for these products until you get through the BLA process. Certainly, there will be fewer products in the market post-BLA approval. So our focus is to get through the trial as quickly as we can and put as many resources as possible to ensure a successful trial. But I don't think there's any confusion or lack of clarity any longer. The FDA has been clear that 351s should not be sold post-May 31.

Matt Miksic, Analyst

Okay. Fair enough. This may increase the value of these products on the other side of that, but we'll have to see how it plays out. On the P&L, based on your comments over the past couple of quarters, the growth has sometimes been really strong. Perhaps it's been too strong for you to keep up with the spending in support of that. You had some significant gains in EBITDA in the latter half of last year, which you mentioned would moderate. I believe you've exceeded expectations again in the first quarter. Please help us understand the pace of growth in spending or if there's any catch-up we should consider for Q2 or Q3. Additionally, how should we model the idea of a positive EBITDA number for the full year, but possibly with a clearer trend.

David Francisco, CFO

Yes. So we did give you some guidance about the 22% up for the full year. Obviously, Q1 was nowhere near that on a year-over-year basis. But recognize that we did still have COVID savings. So we will lap that next quarter, and we expect to see some increased spending that will not continue regarding those savings. We'll continue to add reps, and as we continue to grow throughout the year, we will have incremental commission expenses. Additionally, on the R&D side, it was a little light, and we expect to continue to increase our clinical spending and push harder on that cadence as well.

Operator, Operator

Your next question comes from the line of Ryan Zimmerman from BTIG.

Ryan Zimmerman, Analyst

Congrats. Really impressive. I want to ask maybe a bigger picture question, Gary, a two-part question. But the longer-term revenue outlook for Organogenesis, I think initially it was around 10% to 15% when you guys became public. And then longer-term, I think it was in the mid-teens. Is your view of that outlook changed at all given how strong the performance has been? And then the second part of that question that dovetails with it is, if you could talk a little bit about the strength you're seeing, this growth you're seeing here, that we're seeing in the numbers, is this a reflection of share dynamics? Or are you seeing an uptick in market growth broadly in Advanced Wound Care, just because it is pretty astounding.

Gary Gillheeney, CEO

Thank you. Regarding our long-term growth, we have recently projected low to mid-teens growth after this year. The comparisons will become more challenging as revenue continues to increase. However, we remain optimistic about the company's growth due to the success of our new product launches. Initially, those products were not available in the market, and their introduction has been beneficial. We believe that achieving low to mid-teens growth over the next several years is still feasible for the company. Dave, do you have any additional insights?

David Francisco, CFO

Yes. I mean, at this moment, the law of large numbers too, right? So there could be moderation from that standpoint as well.

Gary Gillheeney, CEO

I think when we see the number of patients that we're treating and the number of accounts that we're acquiring as customers, we definitely feel that there's a market shift in our favor. So we definitely see that happening in the market. Some dynamics from some of the other competitors seem to reflect that as well. We also think that with our expansion in the office channel, we really are expanding the market. There are many offices that have dabbed in wound care and are now starting to actively participate with Advanced Wound Care products and becoming educated in those offers, starting to treat more patients of different types of wounds in the office setting. That is something we believe will continue to grow. Thus, it's a combination of market share shift and expanding the market with multiple channels. Again, the physician specialties that we talk about often, we now serve those markets we never sold to before for indications we weren't focused on previously. It’s a combination of all of that that is really helping to drive revenue.

Ryan Zimmerman, Analyst

Okay. Fair enough. And then as we think about PuraPly, I mean you were facing significant pricing headwinds given the loss of the pass-through. You've clearly demonstrated the ability to work through that with the product introductions. I was wondering if you could talk a little bit about how you think about the adoption of PuraPly going forward in light of what is now two quarters of really strong growth despite these headwinds from pricing.

Gary Gillheeney, CEO

Well, with the multiple sites of care that I've mentioned often, we sell a lot of PuraPly in hospitals. Additionally, we sell it in the office setting. We have multiple sizes for different types of wounds. It's sold across various physician specialties. The market is still young for this product. The procedures that could utilize this technology and the physician specialties being introduced continues to advance. So we see PuraPly as a nice growth opportunity for us over many years.

Ryan Zimmerman, Analyst

Congrats again, guys. Very impressive.

Operator, Operator

Your next question comes from the line of Richard Newitter from SVB Leerink.

Richard Newitter, Analyst

Just to echo, nice quarter. Congrats on the performance. Maybe I can just start off on the regulatory change and rather than so much what that means for you guys in stopping sales, what does that mean for the industry and others who have to stop selling, which could potentially go away? My understanding is that there are a lot of smaller players selling products like this that will have to stop. Maybe talk about what that means for you guys from an incremental share gain opportunity standpoint, and is any of that factored into your guidance increase?

Gary Gillheeney, CEO

Well, certainly, none of it has factored into our guidance increase. We haven't guided to any sales post-May 31. But clearly, there's going to be a change in the market. Not everyone is going down the BLA pathway, so there'll be fewer products available on the other side. We think that's a positive development. Obviously, our expectation is that we would like to be on the other side if we're successful with our BLA. We think it's a positive thing. In the interim, it is certainly a painful situation for us, but not as significant a business for us today as it might be for others. So I think it depends on the company. The pain will vary based on how much of that revenue is part of the revenue mix for that particular company. But it is clear there will be fewer players in the market immediately and then post-BLA.

Richard Newitter, Analyst

And then just thinking about PuraPly and Affinity. In the past, you said, I believe, that you thought Affinity could eventually surpass PuraPly. Now, with PuraPly's outlook continuing to creep higher, do you still feel that comment holds true relative to the level that PuraPly appears to be reaching? And on Affinity, were there any capacity constraints this quarter such that demand was outstripping supply? When did that self-correct?

Gary Gillheeney, CEO

To your first question about Affinity surpassing PuraPly, PuraPly's success is certainly making that a challenge to happen. But yes, we do believe it still has the potential to be our largest product over time, despite PuraPly's success. However, PuraPly is making it a bit more challenging. We had no supply issues this quarter. We actually were able to increase capacity and improve our yield, so we're feeling good about where we are today. It's important to note too that as we increase our capacity, we want to ensure that it is stable before we allocate those units to our commercial organization, as we want to be a reliable supplier for our customers. Thus, while our capacity is increasing, we are cautious to ensure that it remains sustainable going forward.

Operator, Operator

Your next question comes from the line of Steven Lichtman from Oppenheimer.

Steven Lichtman, Analyst

Congratulations on the quarter. Just wanted to touch base on the amnions. You're set to build on Affinity, I believe, later this year with Novachor. Gary, are you still on target to launch that around year-end? And how do you see Novachor contributing to the success of your current franchise?

Gary Gillheeney, CEO

Sure. We do expect to launch Novachor at the very end of the year. It won't be a contributor really until 2022, probably the second half of 2022. As you recall, Novachor shares the manufacturing facility with Affinity, so we're balancing the capacity of both products. Novachor, like Affinity, has unique properties. It provides more utility for certain wound types, giving us more flexibility. We believe it will perform extremely well like Affinity does and will contribute significantly in 2022 and beyond.

Steven Lichtman, Analyst

Great. And then just secondly, obviously, CPN Biosciences has been a solid acquisition for you guys. Given the state of the business and the EBITDA, should we be thinking about potential additional acquisitions either side of your business to bolster or create synergies looking ahead?

Gary Gillheeney, CEO

We're certainly always looking for opportunities for product and channel expansion. We are optimistic about being able to add to our portfolio this year, enhancing not only the office channel but certainly in the surgical side of the business as well. We're expanding our reach into the extremities and trauma areas with our existing portfolio, which is an exciting area for us, and we aim to continue to strengthen that portfolio.

Steven Lichtman, Analyst

Great. Congratulations, guys.

Gary Gillheeney, CEO

Thank you very much.

Operator, Operator

We are currently showing no remaining questions in the queue. At this time, that does conclude our conference call for today. Thank you for your participation.

Gary Gillheeney, CEO

Thank you.