Organogenesis Holdings Inc
NASDAQ:ORGO
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
2.28
4.49
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Organogenesis Holdings Inc
You don't have any saved screeners yet
Welcome, ladies and gentlemen, to the Fourth Quarter and Fiscal Year 2023 Earnings Conference Call for Organogenesis Holdings Inc. [Operator Instructions] Please note that this conference call is being recorded, and 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 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 -- excuse me, including Item 1A, Risk Factors, of the company's most recent annual report and a sequential filing with 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 a result of new information, future events or otherwise, except as required by applicable security laws.
This call also includes references to certain financial measures that are not calculated in accordance with general accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliation 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 Gillheeney Sr., Organogenesis Holdings President, Chief Executive Officer and Chair of the Board. Please go ahead, sir.
Thank you, operator, and welcome, everyone, to Organogenesis Holdings Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. I'm joined on the call today by Dave Francisco, our Chief Financial Auditor.
Let me start with a brief agenda of what we'll cover during our prepared remarks. I will begin with an overview of the fourth quarter revenue results and an update on our key operating and strategic developments in recent months. Dave will then provide you with an [ in-op ] review of our fourth quarter financial results, our balance sheet and financial condition at year-end as well as our financial guidance for 2024, which we introduced in our press release this afternoon. Then I will share some closing thoughts before we open the call for your questions.
Our sales results came in at the low end of our guidance range outlined on our third quarter conference call and reflects the expected challenging operating environment as a result of the local coverage determinations having been announced and subsequently withdrawn last fall. More specifically, our fourth quarter guidance range has assumed continued significant business disruption driven by customer confusion and uncertainty.
As outlined on our last quarter's earnings call, we expected our sales reps to be spending more time servicing existing customers and regaining lost customers versus cultivating new customer adoption thus impacting our year-over-year growth trends in the quarter. Additionally, the higher end of our guidance range assumed improvement in the operating environment as we move through Q4, which ultimately did not materialize.
Despite the challenging quarter, we are pleased to see the positive momentum in the business trends we experienced towards the end of December continue into early 2024 and our commercial team continues to see progress in their broad-based efforts to reengage with our customers to bring our products back to the healing algorithms and formularies. We're encouraged by the evidence that the commercial support programs we implemented to enhance existing customer relationships and to regain lost accounts are proving effective.
Importantly, we dedicated a majority of our time and share of voice during the fourth quarter towards clarifying the misinformation in the market. We have refocused our commercial resources to drive growth in our customer base by emphasizing our differentiated products in their clinical value. Turning to an update on our operational progress in recent months. Our ongoing Phase III clinical trials evaluating the use of renew for the management of symptoms associated with neosteoarthritis continue to progress as planned.
As a reminder, ReNu is a unique cryopreserved amniotic suspension allograft or ASA, containing viable cells, extracellular matrix and importantly, is rich and anti-inflammatory and regenerative growth factors. We achieved the last-patient last-visit milestone in January for the first Phase III clinical trial to evaluate the efficacy of ReNu for the treatment of symptomatic neosteoarthritis and preparations for the database [indiscernible] lock and analysis are currently underway. We are currently targeting the completion of top line data analysis by the end of April, which we intend to share publicly via press release.
In 2021, ReNu received the FDA's Regenerative Medicine Advanced Therapy, or RMAT designation for [indiscernible] neosteoarthritis, which underscores the strength of our existing clinical evidence and its potential to address a largely unmet medical need. And as previously 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 first Phase III clinical trial, combined with the published 200-patient RCT as valid scientific evidence insufficient for BLA approval.
We are also pleased with the progress we're seeing in our second Phase III clinical trial for ReNu. We now have 40 clinical sites up and running and have enrolled more than 200 patients to date. While it's difficult to predict the pace of enrollment with precision, our current time line has us achieving full enrollment in the first quarter of 2025 ahead of our original expectations when we started enrollment in the second Phase III clinical trial last September.
Additionally, consistent with our first Phase III clinical trial, we're on track to enroll between 25% and 30% of the most severe knee OA patient population, also knownas KL4s. While there is no known treatment that completely cures [ NOA ], it is possible to treat the disease symptoms with the goal of avoiding or delaying costly invasive knee replacement surgery. If successful, ReNu would be the only FDA-approved biologic intra-articular [ injection ] to improve the symptoms of the most severe cases of OA.
With that, let me turn it over to Dave. Dave?
Thanks, Gary. I'll begin with a review of our fourth quarter financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net revenue for the fourth quarter was $99.7 million, down 14%. Our Advanced Wound Care net revenue for the fourth quarter was $93.2 million, also down 14%. Net revenue from Surgical & Sports Medicine products for the fourth quarter was $6.5 million, down 3%. Gross profit for the fourth quarter was $71.9 million or 72.1% of net revenue compared to 76.5% last year.
The decrease in gross profit and margin resulted primarily from shifts in product mix compared to the prior year period and a decrease in the pricing for certain of our products. Operating expenses for the fourth quarter were $73.2 million compared to $79.7 million last year, a decrease of $6.5 million or 8%. The decrease in operating expenses in the fourth quarter was driven by a $6.9 million or 10% decrease in selling, general and administrative expenses, offset partially by a $0.4 million or 3% increase in research and development costs compared to the prior year period.
Fourth quarter GAAP operating expenses included $1.9 million of restructuring-related charges compared to $0.8 million in the prior year as well as $0.3 million of compensation expenses related to the retention for those sales employees impacted by the LCD compared to no such costs in the fourth quarter of 2022.
Excluding these items, a noncash intangible amortization of $1.2 million in both periods, non-GAAP operating expenses for the fourth quarter decreased $7.8 million or 10% year-over-year. The material reduction in our non-GAAP GAAP operating expenses reflects our proactive strategy to manage cost in light of the challenging operating environment. We made these difficult strategic decisions to further mitigate the impact to profitability from the lower fourth quarter revenue results.
Operating loss for the fourth quarter was $1.3 million compared to operating income of $8.7 million last year, a decrease of $10 million. Net loss for the fourth quarter was $0.6 million compared to net income of $7.5 million last year, a decrease of $8.1 million. Adjusted net income for the fourth quarter was $1.9 million compared to $8.9 million last year, a decrease of $7 million. As a reminder, adjusted net income is defined as GAAP net income adjusted to exclude the effect of amortization restructuring charges and other certain items, including compensation expenses related to retention for those sales employees impacted by the LCDs and resulting income taxes on these items.
Adjusted EBITDA for the fourth quarter was $7.5 million or 7.5% of net revenue compared to $14.1 million or 12.2% of net revenue last year. We believe our proactive efforts to optimize our cost structure was a key contributor to our ability to deliver positive adjusted net income and adjusted EBITDA, both of which exceeded the low end of our guidance ranges in Q4. We have provided a full reconciliation of our adjusted net income and adjusted EBITDA results in our earnings release.
Turning to a brief review of our financial results for the 12 months ended December 31, 2023. Net revenue was $433.1 million compared to $450.9 million for the year ended December 31, 2022, a decrease of $17.8 million or 4%, of which approximately 90% of the year-over-year decline occurred in the fourth quarter. The decrease in net revenue was driven by a decrease of $16.7 million or 4% in net revenue of Advanced Wound Care products, and a decrease of $1 million or 4% in net revenue of Surgical & Sports Medicine products. Adjusted EBITDA was $42.6 million or 9.8% of net revenue compared to adjusted EBITDA of $49.3 million or 10.9% of net revenue for the year ended December 31, 2022, a decrease of $6.7 million or 14%, all of which occurred in the fourth quarter.
Turning to the balance sheet. As of December 31, 2023, the company had $104.3 million in cash, cash equivalents and restricted cash and $66.2 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, 2022. We also have up to $125 million of available borrowings on our revolving credit facility as of December 31, 2023.
Turning to a review of our 2024 financial guidance, which we introduced in our press release this afternoon. For the 12 months ending December 31, 2024, the company expects net revenue of between $445 million and $470 million, representing a year-over-year increase in the range of 3% to 9% as compared to net revenue of $433.1 million for the year ended December 31, 2023. The 2024 net revenue guidance range assumes net revenue from Advanced Wound Care products between $415 million and $435 million, representing a year-over-year increase in the range of 2% to 7%. And net revenue from Surgical & Sports Medicine products between $30 million and $35 million, representing a year-over-year increase in the range of 9% to 27%.
In terms of our profitability guidance for 2024, the company expects to generate GAAP net income loss in a range of $10.6 million of net loss to net income of $4.6 million. Adjusted net income loss in the range of $8.1 million adjusted net loss to adjusted net income of $7.1 million. We also expect EBITDA in the range of $5.8 million to $25 million and adjusted EBITDA in the range of $15.8 million and $35 million. In addition to our formal financial guidance for 2024, we're providing some considerations for modeling purposes.
As a reminder, the first half of 2023 exceeded our expectations and the strong business momentum continued into the early part of the third quarter, ahead of the final LCD announcement in early August. As a result, our expectations for growth in 2024 are skewed towards the back half, given the 2023 comparable quarterly growth rates. For modeling purposes, we expect first quarter revenue in the range of approximately $98 million to $104 million. Our profitability guidance in 2024 assumes gross margins of approximately 76% to 77%. GAAP operating expenses will increase approximately 10% to 12% year-over-year, and total non-GAAP operating expenses will increase approximately 13% to 14% year-over-year.
Our non-GAAP 2024 operating expenses exclude noncash intangible amortization of approximately $3.4 million. Note that the expected increase in operating expenses this year is primarily related to incremental investments in clinical studies and regulatory-related spending in preparation for our renewed BLA efforts. Our full year 2024 operating expenses also reflect strategic investments to support key commercial initiatives. Finally, our full year profitability guidance ranges also assumed total interest and other expenses of approximately $2 million to $3 million, GAAP tax rate range of negative 3% at the low end of the range to positive 52% at the high end of the range, and we continue to assume a non-GAAP tax rate on adjustments of 27%.
Noncash depreciation of approximately $9.7 million, noncash stock comp expense of approximately $10 million, CapEx of $23 million and a weighted average diluted share count of approximately $133 million. With that, I'll turn the call back over to Gary for some closing remarks.
Thank you, Dave. Before we open up the call to your questions, I wanted to share some additional thoughts on our outlook and underlying assumptions supporting our guidance for 2024.
While the environment remains challenging, we're pleased to see the business trends show improvement in early 2024, and our commercial team continues to see progress in their efforts to reengage with our customers. We're encouraged by the evidence that our commercial support programs we implemented to enhance existing customer relationships and to regain lost accounts are proving effective, and we are proud of the team's continued commitment to our mission.
Our guidance reflects a return to revenue growth for 2024, fueled by new product launches across both Advanced Wound Care and surgical sports medicine markets, including contributions from a new license agreement with Vivex Biologics. We view this license agreement as a great example of our effort to identify growth in margin accretive, high-return opportunities to leverage our valuable commercial infrastructure and leading market position in Advanced Wound Care. We are adding new products to our commercial team solution offerings, which we expect will enhance our share of voice while providing value to customers by broadening our portfolio of differentiated treatment solutions.
Our financial guidance also reflects our intention to continue to invest strategically in our business to support key long-term growth initiatives including our [ renewed ] clinical and regulatory strategy, which we believe represents a significant value driver in the future. Importantly, despite our increased investments, we expect to deliver solid adjusted EBITDA and operating cash flow in 2024, which will help us continue to enhance our balance sheet and financial condition. And we remain confident in the long-term opportunity for Organogenesis, and we expect to remain a leader in the space with highly innovative efficacious products that deliver on our mission to provide integrated healing solutions that substantially improve outcomes while lowering the overall cost of care.
And with that, I'll turn the call over to the operator to open the call up to your questions. Thank you.
[Operator Instructions]
Our first question today will be coming from Ryan Zimmerman of BTIG.
Can you guys hear me okay?
We can, Ryan.
Great. Thank you guys for all the color. I appreciate certainly the early commentary on first quarter. I guess, Gary, it'd be helpful to get your thoughts on just the recovery in the market kind of what you're doing here. I mean in the context of -- it sounds like business trends have improved in December, but reconciling that with your first quarter guidance, which is still down -- just kind of how are you contemplating the recovery in the business given the guidance that you are sharing with the Street for the first quarter?
Sure. So we did see an improvement at the end of December. We've actually seen some improvement in October, and then it kind of flattened out, and we experienced some turnover in the fourth quarter, which affected November and December. The last 2 weeks, we really started to see improvement. January, which is typically a seasonally down period was flat. But the trend really started to move positively in February. And that's a result of all of the retention efforts, not only with our accounts with our people as well. And we had our national sales meeting at the end of January and relaunched our strategy, and that's been very effective sales since our national sales meeting, has been really strong.
So we're encouraged with the accounts that we're bringing back with the productivity of the reps. Some of the actions that we took in the fourth quarter to streamline improved productivity in the commercial operations is starting to take effect and producing results. So we think things will continue to get better in the second half of the quarter.
Ryan, the only thing I'd add too is recognize too that the first quarter of 2023 was quite strong at 11% growth. So it's a comp issue as well.
Yes. Thank you for pointing that out, Dave. That's helpful. And then just to kind of dovetail off that question, I mean, when I look at the adjusted EBITDA guidance, is stepping back a little bit this year, but that's also reflective of maybe some of those programs that you've been putting in place over the past quarter. And so would love to get your philosophy kind of on how you're thinking about managing to profitability this year, if maybe we should think that you're taking your foot off the gas a little bit there to bolster spend to drive growth, to drive new products.
I would like to understand some of the thoughts there. And also how to think about the margin cadence here, Dave, because -- when you look at the gross margin in the fourth quarter, it was down materially from third quarter. How quickly does that bounce back in your view in the context of the 76% guide, 76%, 77%, I think it was that you gave today.
Yes, sure. So on the overall spend, I would say, in '24, one piece is there's a fairly material step-up in R&D. And it's a pretty exciting time, that's an inflection point within the ReNu program. And obviously, was inevitable that, that would pick up over time.
And there's several things that are happening from that perspective. The second trial moving in, it's enrolling quite well, as Gary mentioned. And so we've got some expenses associated with that. And then obviously, all the preparations go into making sure that we're ready to submit the BLA. So there's quite a bit of work going on there. And then I think when you think back to where we were in '23, the last time we guided before we issued the guidance in the fourth quarter, it was back in Q1. And at that time, we had anticipated the operating expenses to non-GAAP operating expenses to be up 4% to 5%. When we reguided in Q4, we expected those to be flat because we took several cost actions, and then we came in at minus 2%.
So some of that is building that back up, that infrastructure as we returned to growth in '24. And so yes, we are very conscious of the profitability. I think given the declines that we saw in '23, we tried our best to manage the bottom line as well, and I think we'll continue to do that. But there are some key strategic investments that we have to keep making in '24, and we'll keep moving forward on that. You asked specifically about the gross margin. And so I do think we'll start to return to a more normal cadence, but it will migrate throughout the year as volume comes through.
As we talked about recently, we are seeing some pressure on there from a price standpoint. But the big piece in Q4 was around mix. Some of the more higher contribution margin products were specifically impacted quite significantly from these LCDs, and we expect those to dig their way out as we go through Q4. I mean, excuse me, 2024.
Okay. If I could just sneak one more in. Kind of the ultimate question that investors have been asking is, is there a resumption in your view or in your guidance for the LCDs to return? And Gary, just would appreciate your view on the potential for that to occur and how you're factoring that into estimates for 2024?
So we -- obviously, we don't know whether there will be any changes or any new LCD policies coming out. Again, our thinking is there probably won't be anything significant, certainly not in the beginning of the year. I think with the physician fee schedule coming out, there may be some dovetailing around what that might say. So we think being an election year, being the physician fee schedule coming out and the amount of issues that were in the last LCDs, I think the process will be more robust, more transparent.
And I think the physician fee schedule may have an impact on how they're designed -- so with all of that, I think we don't see anything happening in the first half of the year and the second half of the year, I wouldn't expect anything significant, but we don't know the answer, obviously. And we have not considered -- we have not considered any impact of an LCD change in our guidance.
Our next question will be coming from Ross Osborn of Cantor Fitzgerald.
So maybe just a little bit more on the fourth quarter. Would you discuss the rep turnover? It looks like you lost maybe about 45 reps. And then as a follow-up, can you parse out rep productivity versus hiring new reps in 2024 and reaching your guidance range?
Yes. So I mean, obviously, the reported rep count is -- frankly, it's a little bit misleading. We have 2 categories of reps as many companies probably do. We have specialists and then associates. And as you kind of see those throughout the year and the fourth quarter, there's a fairly significant drop off in the associates. And so what you're seeing there is the best of the associates get promoted into the specialist role and specialist role has kind of really maintained there.
So when you take a look at the total amount of associates and specialists, then it looks like the level of productivity has to increase quite significantly. But if you look at it just from the specialist standpoint, which are the ones that are generating the vast majority of the revenue, it's a minor uptick in '24.
Okay. Perfect. And then maybe just one on Surgical & Sports, [indiscernible] realize it's a much smaller piece of business. But the guidance range in terms of growth is quite large. Could you maybe just walk us through some of the drivers and hitting the low and high end of that?
Yes, sure. I mean I think it's obviously a fairly wide range from a percentage basis, but it's a much smaller business that we continue to ramp up. As you know, we've been in kind of repositioning mode for some time since the FDA upregulation of both ReNu and NuCel, but we're really now in a position to drive growth in our view. We have the right leadership. We're building out the direct reps, broadening channel access and with that agency reach and bringing some new products to market.
So we feel quite good about the opportunity set that we've got in front of us. And '24 I think, is going to be a good year, and we see a lot of opportunity for us going forward as well.
Okay. Perfect. And then [indiscernible] for us. Could you just walk us through your rationale for the license and a [ factoring ] agreement with [indiscernible] .
Yes, sure. I mean it's an opportunity for us to bring another product to market. It's a [ dehydrated ] product that's a dual layer that we're commercialized right now. And so -- from our standpoint, I think Gary mentioned it, it's growth accretive, it's GM accretive and profit EBITDA accretive. So we think it's a real opportunity for us to continue to identify opportunities out there that really kind of add to our bag and then leverage the broad commercial infrastructure that we have and the leadership position that we have in Advanced Wound Care. So it's a great partnership. We're excited about it and look forward to continuing to report out on the progress that we make there.
And our next question will be coming from Drew Ranieri of Morgan Stanley.
Just maybe to touch on something that Ryan brought up with his first question. But as you are thinking about recapturing some of these past accounts, can you just maybe walk us through like what you are actually seeing on a ground level? Do you view these clinicians just snap back all of their business and you get back to the run rate immediately? Or is there still kind of a handholding process to get back to where they were before some of the competitive changes?
Yes, it's really different based on site of care. So when you -- when HOPD more of a hospital setting, it's more of a process kind of like a back process where you've got to get back through the committees and get back on formulary. So that takes a little bit longer. Again, it's just the process. In the office, it's a little quicker. Once you can get the attention, obviously, of the clinician and getting through that process, it's usually a lot faster.
But what they typically like to see is -- they'd like to see the product that they actually are reimbursed, so they'll start slow in both sites of care with a small order and then wait to see how the reimbursement works, that is as they understood it and as we educate them on it. And then they're buying patterns start to move back to what they historically was. So you have a longer delay in HOPD, but you also have the general delay if people want to see exactly what the reimbursement is and that the change is, in fact, back to reimbursement is there and it's real. Particularly in the office, they don't follow this as close as the hospitals. So they're very cautious in coming back and testing reimbursement.
Got it. Great. And maybe just on the licensing agreement that you discussed. I appreciate that it's growth accretive, margin accretive, can you help us frame how significant this could be for your Advanced Wound Care business for '24, just to give us a sense of what's kind of like a true inorganic number versus organic appreciating that it is a license and -- and Gary, you also talked a bit in your prepared remarks about new products. So maybe just help us with how that's been factored into your guidance and what we should be able to look out for? Are these more incremental or just better mix for you?
Yes. So Drew, it's incorporated into our guidance. And as we've done over the last several quarters, we've been kind of moving away from product-specific disclosure. And so it's incorporated into the guidance. And as I mentioned in the discussion with [ Ross ], we're looking forward to letting you know how it progresses going forward. But we haven't been disclosing that level of detail, even at the purply level. So we haven't broken that [ out ].
But it does give us, Drew, it does give us some flexibility and optionality in our product mix. It gives us some more flexibilities on sites of care, and we certainly expect it to contribute to our growth in 2024.
Got it. And there's just any other new products that we should be on the lookout for broadly in your portfolio for 2024?
Well, we did mention that we have two products that we'll be launching both in surgery and we're expecting that those products will contribute, both in wound care and surgery. They're primarily for the surgical area, larger pieces of our PuraPly technology.
We are showing more questions in the queue at this time. This does conclude our conference for today. Thank you for your participation.
Thank you.