Earnings Call Transcript - ORGO Q3 2020

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2020 Earnings Conference Call for Organogenesis 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, including the risks and uncertainties described in the Company's filings with the Securities and Exchange Commission including Item 1A of the Company's most recent annual and quarterly report.

Gary Gillheeney, CEO

Thank you, and welcome, everyone to Organogenesis Holdings' third quarter 2020 earnings conference call. I'm joined today on the call by Henry Hagopian, our Interim Chief Financial Officer. Now let me start with a brief agenda of what we will cover during our prepared remarks today. I'll start with an overview of our revenue performance in the third quarter, including the improving business trends we experienced during the quarter and the areas of our business that have performed extremely well despite the challenging operating environment. After my opening remarks, Henry will provide you with a more in-depth review of our quarterly financial results and the formal financial guidance we included in this afternoon's press release, as well as a summary of our balance sheet and financial condition. And then, we will open up the call for questions. Let me begin with the review of our third quarter revenue performance. We reported total revenue growth of 57% year-over-year in the third quarter driven by 66% growth in our Advanced Wound Care products and 9% growth in our Surgical & Sports Medicine products compared to the prior year. Our revenue results were well above expectations and exceeded the high end of our preliminary revenue range announced on October 14th. Our growth in Q3 reflects the continuation of the key drivers of our growth strategy and competitive advantages that we've been discussing on each of our earnings calls. The investment we've made to expand our sales force in recent years, the benefits of our comprehensive and differentiated portfolio of products that address patients' needs to treat wounds across all stages of healing and strong execution of our commercial strategy focused on leveraging multiple channels, new product introductions, and brand loyalty.

Henry Hagopian, Interim CFO

Thank you, Gary. I will begin with a review of our third quarter financial results. Unless otherwise specified, all growth rates referenced in my prepared remarks are on a year-over-year basis. Net revenue for the third quarter of 2020 was $128 million, compared to $64.3 million for the third quarter of 2019, an increase of $36.5 million or 57%. Third quarter revenue results came in above the high end of the preliminary revenue range provided on October 14th. Revenue from Advanced Wound Care products for the third quarter of 2020 was $90 million, compared to revenue of $54.3 million for the third quarter of 2019, an increase of $35.7 million or 66%. Revenue from Advanced Wound Care products represented 89% of total revenue in the third quarter of 2020, compared to 85% of total revenue in the prior year period. Revenue from Surgical & Sports Medicine products for the third quarter of 2020 was $10.8 million, compared to $10 million for the third quarter of 2019, an increase of $0.9 million or 9%.

Operator, Operator

Thank you. And our first question will come from Matt Miksic with Credit Suisse. You may proceed with your question.

Vik Malhotra, Analyst

This is Vik filling in for Matt. Thanks so much for taking the question. I have two questions. The first one is about the rising COVID cases throughout the U.S. Again, can you see any sort of impact on your physician office channel strategy in the last couple of weeks? I guess, and then I have a follow up.

Gary Gillheeney, CEO

Hi, Vik. We haven't seen a decline in the office setting at all. However, at the end of Q3, we did see a slight decline in access to the outpatient Wound Care Center. Although we maintain virtual contact with all our customers, we haven't seen an impact on sales in the outpatient setting at this point. However, we have seen a trend of some outpatient centers starting to limit access.

Vik Malhotra, Analyst

And I guess one follow up, if I could. You spoke about PuraPly trends in the quarter. I was just wondering if you could help us learn what you've seen in the past couple of weeks with the pass-through having expired? And how that expiration of pass-through was impacting your larger product sizes thus far? Thanks so much.

Gary Gillheeney, CEO

Sure. It's still a little early to tell, but what we did see is that we didn't see the decline in PuraPly revenue in Q3 that we had seen in the past. Typically, six to seven weeks prior to the expiration of pass-through, we would see a decline. We did not see that decline this time. So that was important and encouraging. We did introduce some new sizes of PuraPly and we've also accelerated our office growth strategy with PuraPly. Both of those are doing well. The office strategy sale of PuraPly is performing well. Our XT line extension in the office is doing extremely well. And the new sizes that we're introducing under the bundle to absorb some of those larger wounds are also performing well. So those are the positive trends that Henry had alluded to.

Operator, Operator

Thank you. Our next question comes from Ryan Zimmerman with BTIG.

Ryan Zimmerman, Analyst

Maybe Gary, just to start on the CPN Biosciences acquisition, can you talk about the longer-term rationale for that acquisition? Is it around the physician management component aspects of that business? Or is it on the products that you can offer, maybe expanding some areas that you previously weren't in? And also just get your thoughts there, and I have a follow-up.

Gary Gillheeney, CEO

Sure, it's really more about accessing additional accounts for us and the ability to reach beyond the office all the way to the home eventually, where we see a lot of the wounds moving. So, it's more of an access opportunity for us that generates additional product sales. They also have some first-in-line advanced wound care products that we don't have. This will also give us an earlier introduction to patients, which will enhance our ability to sell our other products. We expect that our products, as well as their products, will be pushed through that channel. Additionally, it does offer us the ability to stay connected to those customers on a daily basis, which enhances our share of voice for Organogenesis within that channel and provides a more efficient way to communicate in the sales in the office channel.

Ryan Zimmerman, Analyst

Okay, that's very helpful. And then maybe, Henry, for you. Amniotic served showed really strong margin performance this quarter. Based on your guidance for the fourth quarter, I would suggest that that's just going to continue. If you can help us with the puts and takes there as you think about the margins longer term, especially as PuraPly dynamics may shift, how can we think about margins, particularly as amniotic drives such improved margin performance? Thank you.

Henry Hagopian, Interim CFO

We don't guide on our margin by product, but we feel very confident that the trends we have experienced here in Q3 will continue.

Ryan Zimmerman, Analyst

Understood, thank you.

Gary Gillheeney, CEO

So maybe a little more color, Ryan. PuraPly coming off a pass-through has some ASP implications for the bundle. But in the office, we have a little bit of margin there. However, our other products, to your point, our amniotic technology and our line extensions of PuraPly will help offset that margin decline you would naturally get from those larger pieces in the bundle set.

Ryan Zimmerman, Analyst

Okay, that's helpful color. Thank you, Gary.

Gary Gillheeney, CEO

Sure.

Operator, Operator

Our next question comes from Steven Lichtman with Oppenheimer & Company. You may proceed with your question.

Steven Lichtman, Analyst

Thank you. Hi, guys. Gary, just wanted to touch base on Affinity, just given the extraordinary growth you're seeing in Advanced Wound Care and amniotic in particular. Any color you can provide on how much we’re seeing in the near term as pent-up demand prior to being able to relaunch in the first half of this year versus some of the expansion you talked about with new customers? And what is that runway like that you see as an expansion into new customers in the office channel?

Gary Gillheeney, CEO

Sure. Yes, there was some pent-up demand for the product in Q2 because we did have some existing customers back in 2018. However, the majority of the growth is from our existing customers who had not used Affinity and the expansion of our customer base. One of the advantages of our amniotic technology is that we are really expanding the market as we're doing that with our amnion. Furthermore, we've also experienced in the offices that all brands are growing, not just Affinity. This gives us confidence that we are expanding the market by adding customers and attracting those who haven’t used some of the advanced modalities that we now offer.

Steven Lichtman, Analyst

Got it. Thank you. And then just a follow-up on NovaCor. Can you talk a little bit about the timing of that launch? And how you think that will further add to the momentum in your amnion business?

Gary Gillheeney, CEO

Our expectation is that NovaCor will be launched sometime in Q4 of next year. One of the challenges we have with launching NovaCor is that it's manufactured by the same manufacturer that produces Affinity. As I mentioned on several calls, we're continuing to ramp up our Affinity manufacturing each quarter. This creates execution challenges, but it also takes up some of the capacity for NovaCor. Therefore, it really depends on how long Affinity continues to grow at its current pace. But right now, we're projecting Q4 of '21 for the launch, and we do expect it to be a significant growth driver for the Company in the future.

Operator, Operator

Thank you. At this time, we are currently showing no remaining participants in the queue, and we are currently showing no remaining questions. That does conclude our conference for today. Thank you for your participation.

Gary Gillheeney, CEO

Thank you very much.