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Organogenesis Holdings Inc (NASDAQ:ORGO)
Q3 2019 Earnings Call
Nov 12, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2019 Earnings Conference Call for Organogenesis Holdings, Inc. [Operator Instructions]

Before we begin, I would like to remind everyone that all 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 Form 10-K for the year ended December 31, 2018.

You are cautioned to not 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 the applicable securities law.

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 Gillheeny Sr., Organogenesis Holdings, President and Chief Executive Officer. Please go ahead, sir.

Gary S. Gillheeney -- President and Chief Executive Officer

Thank you and welcome everyone to Organogenesis Holdings' third quarter 2019 earnings conference call. Today I'm joined on the call by Tim Cunningham, our Chief Financial Officer.

So let me start with a brief agenda of what we will cover during the prepared remarks. I'll start with a high level overview of our revenue performance during the third quarter and first nine months of 2019. After my opening remarks, Tim will provide you with a more in-depth review of our quarterly and year-to-date financial results as well as an overview of our financial guidance for 2019 which we updated today in our earnings press release. Following Tim's discussion of our financial results and outlook, I will then share some thoughts on why we believe we are well positioned for continued strong growth in 2019 and solid long-term growth going forward. And then I will open it up for questions.

Our performance during the first nine months of 2019 was very strong and our financial results to-date reflect the solid execution of our commercial strategy this year. Our total revenue increased 44% over the first nine months of 2019. Our gross profit increased 66% and we reported strong improvements in profitability with our operating loss and adjusted EBITDA loss decreasing 41% and 47% respectively year-over-year. We expect our fourth quarter results will reflect the continuation of the strong commercial momentum we've experienced during 2019, a year in which we expect to increase on net revenue by 31% to 34% year-over-year as reflected in our full year guidance which we updated today in the press release.

Turning to a quick review of our third quarter revenue performance. We reported total revenue growth of 27% year-over-year in the third quarter, driven by sales of our Advanced Wound Care products of 25% and sales growth of our surgical and sports medicine products of 39% year-over-year. This strong growth was driven by investments we've made in expanding our sales force over the last 12 to 18 months where we've increased our direct sales team from approximately 190 at the end of 2017 to approximately 240 as of September 30 2019, an increase of over 26% for the period. We've also expanded the number of independent agencies that we are working with in the surgical and sports medicine market to approximately 145 at quarter end, up 61% from the end of 2017.

Our third quarter results also benefited from the favorable reimbursement decision for our largest product line PuraPly. Revenue from PuraPly products for the third quarter of 2019 was $31.8 million compared to $17.9 million in the third quarter of 2018, an increase of $13.9 million or 78% year-over-year. The impressive growth in sales of our PuraPly products represented the largest driver of growth in our Advanced Wound Care business which increased 25% year-over-year and this growth performance is notable given the headwind from Affinity being off the market, which represents more than 10 percentage points of growth in the period. Importantly, we continue to expect to have commercial scale of Affinity by the end of Q1 2020.

We continue to leverage our strong demand for PuraPly by growing the number of PuraPly customers and driving customers and clinician adoption deeper into existing PuraPly accounts. We also continue to expand the number of Organogenesis products that our customers are purchasing.

We also reported stronger than expected revenue growth in our surgical and sports medicine business sealed by our strong portfolio of differentiated orthobiologic products including NuCel for bony fusion in the spine and extremities, our surgical and sports medicine, growth in the third quarter was particularly impressive given the supply related challenges we had for NuCel, but the investments in expanding our sales team as well as strong execution helped drive growth of 39% year-over-year.

We've more than doubled the number of agencies selling our surgical and sports medicine portfolio over the last two years and this investment continues to pay dividends in driving significant revenue growth and increasing our overall market share .Third quarter revenue growth also benefit of the sale of our commercially available amniotic products which increased in the high teens, year-over-year against a difficult growth comparison in the prior year. This increase reflects the strong execution of our sales force against our strategy and leveraging the strong adoption of PuraPy into broader adoption utilization of our non PuraPly problems.

Third quarter amniotic product growth did benefit from the improvements we've made in our product capacity toward the end of the second quarter, and we ended Q3 with improved capacity in our back to focusing on commercial growth to take advantage of that additional capacity.

And with that let me turn it over to Tim to review our financial results for the third quarter and nine months ended 2019. Tim?

Timothy M. Cunningham -- Chief Financial Officer

Thank you, Gary. I will 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. Revenue for the third quarter of 2019, was $64.3 million compared to $50.8 million for the third quarter of 2018, an increase of $13.5 million or 27%.

Revenue from Advanced Wound Care products for the third quarter of 2019 was $54.3 million compared to revenue of $43.6 million for the third quarter of 2018, an increase of $10.7 million or 25%. Revenue from Advanced Wound Care products represented 85% of total revenue in the third quarter of 2019 compared to 86% of total revenue in the prior year period. The increase in Advanced Wound Care revenue was primarily attributable to additional sales personnel, PuraPly regaining pass through reimbursement status. The two-year period, effective October 1, 2018 and the continued growth in adoption of our amniotic products despite the suspension of Affinity beginning in the first quarter of 2019.

Revenue from surgical and sports medicine products in the third quarter of 2019 was $10 million compared to $7.2 million for the third quarter of 2018, an increase of $2.8 million or 39%. Revenue from surgical and sports medicine products represented 15% of total revenue in the third quarter of 2019, compared to 14% of total revenue in the prior year period. The increase in surgical and sports medicine revenue was primarily due to the expansion of our sales force and penetration of new and existing accounts.

Revenue from PuraPly products for the third quarter of 2019 was $31.8 million compared to $17.9 million for the third quarter of 2018, an increase of $13.9 million or 78%. Revenue for PuraPly products represented 49% of total revenue in the third quarter of 2019, compared to 35% of total revenue in the third quarter of 2018.

As of September 30, 2019, we had approximately 240 direct sales representatives compared to 215 at year-end and approximately 145 independent agencies, compared to 130 at year-end.

Gross profit for the third quarter of 2019 was $45.1 million compared to $31.3 million for the third quarter of 2018, an increase of $13.8 million or 44%. Gross profit for the third quarter of 2019 was 70% of revenue compared to 62% for the third quarter of 2018. The improvement in gross margin resulted primarily from a more favorable product mix in the third quarter of 2019. PuraPly regaining pass through reimbursement status. And volume based manufacturing efficiencies.

Operating expenses for the third quarter of 2019 were $53.4 million compared to $41.4 million for the third quarter of 2018, an increase of $12 million or 29%. The increase in operating expenses in the third quarter of 2019 as compared to the third quarter of 2018 was driven primarily by higher selling, general and administrative expenses, which increased to $49.5 million compared to $38.6 million in the third quarter of 2018, an increase of $10.9 million at 28%. The increase in selling general, administrative expenses is primarily due to additional headcount, mainly hiring in our direct sales force, higher sales commissions as a result of increased revenue and increased marketing and promotional expenses for our products.

R&D expenses for the third quarter of 2019 were $3.9 million compared to $2.8 million for the third quarter of 2018, an increase of $1.1 million or 41%. The increase is primarily due to additional headcount and investment in new and continuing clinical programs and our new product pipeline.

Operating loss for the third quarter of 2019 was $8.3 million, compared to an operating loss of $10.1 million for the third quarter of 2018, a decrease of $1.8 million or 18%. The decrease in operating loss in the third quarter of 2019 was driven by the 44% increase in gross profit, partially offset by a 29% increase in operating expenses.

Total other expenses net for the third quarter of 2019 were $2.4 million, compared to $3 million for the third quarter of 2018, a decrease of $0.6 million or 19%. The decrease was primarily driven by a $0.5 million, decrease in interest expense.

Net loss for the third quarter of 2019 was $10.7 million or $0.12 per share compared to a net loss of $13.1 million or $0.19 per share for the third quarter of 2018, a decrease of $2.3 million or 18%.

The adjusted EBITDA loss for the third quarter of 2019 was $4.8 million compared to an adjusted EBITDA loss of $7.3 million for the third quarter of 2018, a decrease of $2.5 million for 34%. We have provided a full reconciliation of our adjusted EBITDA results in our earnings release, Form 8-K, Form 10-Q, all of which were filed with the Securities Exchange Commission this afternoon.

Turning to a review of our financial results for the first nine months of 2019. Revenue for the first nine months of 2018 was $186.3 million, compared to $129.9 million for the first nine months of 2018, an increase of $56.5 million or 44%. Revenue from Advanced Wound Care products for the first nine months of 2019 was $157.4 million, compared to revenue of $109.7 million for the first nine months of 2018, an increase of $47.7 million of 43%. Revenue from Advanced Wound Care products represented 84% of total revenue in the first nine months of '19 consistent with the prior year.

Revenue from surgical and sports medicine products for the first nine months of 2019 was $28.9 million compared to $20.1 million for the first nine months of 2018, an increase of $8.8 million or 44%. Revenue from surgical and sports medicine products represented 16% of total revenue in the first nine months of 2019, consistent with the prior year period.

Revenue from PuraPly products for the first nine months of 2019 was $86.9 million, compared to $41.3 million for the first nine months of 2018, an increase of $45.6 million or 111%. Revenue from PuraPly products represented approximately 47% of total revenue in the first nine months of 2019, compared to 32% of total revenue in the first nine months of 2018.

Gross profit for the first nine months of 2019 was $130.8 million, compared to $78.6 million for the first nine months of 2018, an increase of $52.2 million or 66%. Gross profit margin for the first nine months of 2019 was 70% of revenue, compared to 60% of revenue for the first nine months of 2018. The improvement in gross -- in gross margin resulted primarily from increased sales volume, due to the strength in our Advanced Wound Care products, higher margins realized a result of manufacturing efficiencies, PuraPly regaining pass through reimbursement status for the two-year period, effective October 1, 2018.

Operating expenses for the first nine months of 2019 were $158.5 million, compared to $125.6 million for the first nine months of 2018, an increase of $32.9 million or 26%. The increase in operating expenses in the first time months of 2019 as compared to the first nine months of 2018 was driven primarily by higher selling, general, administrative expenses, which increased to $147.3 million compared to $114.5 million in the first nine months of 2018, an increase of $32.8 million or 29%. The increase in selling, general and administrative expenses is primarily due to additional headcount, mainly hiring in our direct sales force, higher legal, consulting fees and other costs associated with the ongoing operations of our business and the warrant exchange offer transaction.

R&D expenses for the first nine months of 2019 were $11.2 million compared to $7.7 million in the first nine months of 2018, an increase of $3.5 million or 46%. The increase was primarily due to additional headcount and investment in new and continuing clinical programs.

The operating loss for the first nine months of 2019 was $27.7 million, compared to an operating loss of $47.1 million for the first nine months of 2018, a decrease of $19.4 million or 41%. The decrease in operating loss in the first nine months of 2019 was driven by strong operating leverage as gross profit increased 66%, partially offset by operating expenses increasing 26%.

Total other expenses net for the first nine months of 2019 were $8.2 million, compared to $8.4 million for the first nine months of 2018, a decrease of $0.2 million or 2%. The decrease was driven primarily by $1.7 million decrease in interest expense and a decrease in the change in the fair value of the warrants liability of $0.3 million due to the exercise of the underlying warrants offset partially by a $1.9 million non-cash loss on the extinguishment of debt related to the write-off of unamortized debt discount and prepayment penalties upon repayment of the master lease agreement upon closure of the new $100 million Silicon Valley Bank led financing in March of 2019.

Net loss for the first nine months of 2019 was $36.1 million or $0.40 per share, compared to a net loss of $55.6 million or $0.83 per share for the first nine months of 2018. A decrease of $19.5 million or 35%.

Adjusted EBITDA loss for the first nine months of 2019 was $19 million, compared to an adjusted EBITDA loss of $36.1 million for the first nine months of 2018, a decrease of $17.1 million or 47%.

Turning to the balance sheet. As of September 30, 2019, the company had $23 million in cash and $100.8 million in debt obligations, of which $17.8 million were capital lease obligations, compared to $21.3 million in cash and $59.3 million of debt obligations, of which $17.7 million were capital lease obligations as of December 31, 2018.

The net change in cash of approximately $1.8 million for the nine months ended September 30, 2019 was driven by $31.7 million of cash provided by financing activities, offset by $27.1 million of cash used in operating activities and $2.8 million of cash used in investing activities during the period.

Before turning to review of our 2019 guidance, I wanted to review a series of transactions that occurred during the third quarter related to the company's outstanding public and private placement warrants. Specifically on July 22, the company made an exchange offer to all its holders of the $30.9 million outstanding warrants. The offer was to exchange 0.095 shares of common stock for each warrant tendered. On August 16, the expiration date of the exchange offer, we announced that 29.95 million warrants were tendered, roughly 97% of all outstanding public warrants, which resulted in the issuance of 2.8 million shares of common stock.

On August 19, we issued another 80,000 shares for the remaining untethered public warrants at an exchange ratio of 0.0855 per share. We also issued 390,000 shares of common stock in exchange for the 4.1 million private placement warrants outstanding during the period. Together the series of transactions resulted in issuance of 3.3 million shares of common stock in the third quarter, which allowed us to retire all of our outstanding warrant obligations during the period. The shares issued represented approximately 3.5% dilution after such issuances, but avoids the potential dilution of nearly 17.5 million shares or roughly 16% dilution, if the warrants were executed per the original terms at some point in the future. We believe these warrant transactions were prudent use of capital, as they removed a significant solution overhang and improved our overall capital structure.

Turning to review of our 2019 revenue guidance which we updated in our earnings release this afternoon. For the 12 months ended December 31, 2019, the company now expects total revenue of between $253 million and $260 million, representing growth at the midpoint of the range of approximately 33% year-over-year. The updated 2019 revenue forecast now assumes revenue from Advanced Wound Care products of between $215 million and $220 million representing growth of approximately 31% to 34% year-over-year, as compared to revenue of $164.3 million for the 12 months ended December 31, 2018, and the company's prior guidance range which call for revenue between $219 million and $224 million in 2019.

The updated 2019 revenue forecast also assumes revenue from Surgical and Sports Medicine products of between $38 million and $40 million representing growth of approximately 31% to 37% year-over-year, as compared to revenue of $29.1 million for the 12 months ended December 31 2018, and the companies prior guidance range which call for revenue of between $31 million and $38 million in 2019.

Finally, the updated 2019 revenue guidance range now assumes that revenue from the sale of our PuraPly products will represent between $119 million and $124 million, representing growth of approximately 70% to 78% year-over-year, as compared to revenue of $69.8 million for the 12 months ended December 31, 2018, and the company's prior guidance range which call for revenue between $110 million and $120 million in 2019.

With that, I'll turn the call back over to Gary. Gary?

Gary S. Gillheeney -- President and Chief Executive Officer

Thanks, Tim. Overall we are pleased with our operating and financial performance during the first nine months of 2019. We are focused on continuing to execute during the fourth quarter, so we can end the year on a strong note. We've updated our net revenue guidance as Tim mentioned, which assumes growth of 31% to 34% year-over-year as we drive strong adoption and utilization of our product portfolio and product solutions for the Advanced Wound Care and the Surgical and Sports Medicine market.

We have strong commercial strategy and continued -- in our continued success in executing the strategy will result in strong adoption and utilization of our product solutions for Advanced Wound Care and Surgical Sports Medicine markets. In addition to strong commercial execution, our strategic growth plan also prioritizes the areas of operational progress, continued development of our new product pipeline and improvement of our profitability profile. Importantly, we are committed to delivering on our mission to provide integrated healing solutions that substantially improve medical outcomes while lowering the overall cost of care.

We believe we have several unique strengths that position us well for future growth. We are a leader in the regenerative medicine space with strong brand recognition. We are well positioned in large attractive and growing markets. We have a comprehensive suite of products to address not only the clinical, but the economic needs of our patients and providers. We have a large and growing body of clinical data and a portfolio of products with FDA, PMA approvals and FDA clearances. We've established a robust and extensive customer relationships with hospitals, wound care centers, government facilities, ASCs, and in physician offices to sell our broad portfolio of products.

We've established a scalable regulatory manufacturing and commercial infrastructure and our executive management team has extensive experience in the regenerative medicine industry boasting over 100 years of collective experience and accomplishments in the space. We look forward to speaking with the investment community in the future and appreciate your interest in Organogenesis.

And with that, I'll turn it back over to the operator. Thank you.

Questions and Answers:

Operator

Thank you sir. [Operator Instructions] And our first question will come from Matt Miksic of Credit Suisse. Your line is open.

Victor Lin -- Credit Suisse -- Analyst

Hey, good afternoon. This is Vic for Matt. Thank you for taking my question. First off, congrats on the great quarter. I'm just wondering if you can provide a bit more clarity on what's driving growth in PuraPly. Last quarter you called out some of the smaller sizes and additional physician specialties -- specialties. Can you provide us an update on that please. And I have one follow-up. Thanks.

Gary S. Gillheeney -- President and Chief Executive Officer

Sure. Well in addition to the sizes that we offer, which expanded the the portfolio to make it more attractive in certain sites of care, we have different reimbursement models for different sites of care, but more importantly, the number of accounts that we're purchasing PuraPly in the past are now purchasing more PuraPly. So we've driven PuraPly deeper in the existing accounts. We also have a lot of new accounts that have never purchased PuraPly as well. And what we're seeing is accounts that only bought PuraPly have also purchased additional Organogenesis products, which is not directly related to your question, but we're seeing an expansion in all the products, all driven by PuraPly. And we are seeing more sales in different physician specialties such as dermatology, plastic surgery and even a little in trauma. So the strategy is working. The brand is expanding and the number of surgical specialties utilizing the product is expanding as well.

Victor Lin -- Credit Suisse -- Analyst

Great, that's super helpful. Just one follow-up if I could. With regards to your sales reps and independent agencies, it looks like it didn't really change from Q2. So how should we think about that for the fourth quarter and going into next year? Thank you.

Gary S. Gillheeney -- President and Chief Executive Officer

Sure, great question. So we slowed our hiring of our sales reps in Q3 because of the amniotic capacity issues we had so we solved that capacity issue at the end of Q3 and we now are in the process of hiring additional reps in Q4. So we're still guiding to have in the range of 265-275 direct sales reps by the end of the year.

Operator

The next question will come from Ryan Zimmerman of BTIG. Your line is open.

Ryan Zimmerman -- BTIG Research -- Analyst

All right, great, thanks Gary, Tim, congrats on the progress. I want to dig into the guidance a little bit to start. You moved up guidance for the year about a hair about $0.5 million overall, but you did move the segments around a little bit particularly within AWC as a little lower than previously guided. And then conversely sports med -- surgical and sports med went higher. And so maybe if you kind of just dissect the puts and takes there a little bit kind of what's driving that and particularly what drove AWC in the quarter relative to surgical and sports med where we were -- we did a little better than we were expecting. Thank you. And I have a follow-up.

Gary S. Gillheeney -- President and Chief Executive Officer

Tim, do you want to handle it.

Timothy M. Cunningham -- Chief Financial Officer

Sure. So you're correct Ryan, that we increased the midpoint of our guidance by $500,000 which assumes 33% growth. The increase in our range at the midpoint was driven by higher surgical and modestly lower wound care and if you dig into wound care particularly, we have previously guided that we had supply constraints in Q3 for NuShield, so exiting -- entering Q4 we've solved that.

And if you recall each quarter of this year we have raised our guidance, and that's despite the Affinity headwind, which we announced in January. So we didn't change our guidance at all. We've been selling through with our product portfolio strategy to make up for the headwinds in the loss of our product rather than taking guidance sound like I said, we've been increasing it. So we are -- that's the major reasons for the puts and takes. And Gary is there anything I missed that you want to add?

Gary S. Gillheeney -- President and Chief Executive Officer

And maybe just a few points. So as mentioned with the earlier question, we've slowed our hiring down in Q3 and now ramping up in Q4. So we have fewer reps than our original guidance. Tim also mentioned Affinity being off the market, and I think I mentioned this last quarter that the pressure on the annual guidance gets higher and higher as the year goes on, because of the assumption of higher Affinity sales in our original guidance. So it's a combination of a slowing the rep hiring down, a lot more pressure of Affinity on the rest of the portfolio and still feeling a little bit of the NuShield capacity constraints that we had in Q2 and Q3, which slowed the ramp of our sales team in Q3 and Q4. So it's a combination of those factors.

Ryan Zimmerman -- BTIG Research -- Analyst

Okay. That's really helpful for the color, I appreciate that. And then, Gary, you mentioned Affinity get into scale first quarter '20. So, maybe if I could just put a little finer point on that, and that's a whole as you did, but what is that -- what does that being, and does that mean full production. Could you have some Affinity sales early in the quarter that may not be at scale. I just wanted to understand what you meant by that? Thank you.

Gary S. Gillheeney -- President and Chief Executive Officer

Sure. So we expect to be at full scale in manufacturing production at the end of Q3. So it's, excuse me, is Q1, at the end of Q1. So it's possible we could have small amount of sales in Q1. But the real ramp will be in Q2 when all of our sales reps are trained and have access to that capacity. But it would not be any material sales in Q1.

Ryan Zimmerman -- BTIG Research -- Analyst

Okay, understood. That's helpful. I'll hop back in queue and let some others ask. Thank you, Gary. Thanks Tim.

Gary S. Gillheeney -- President and Chief Executive Officer

Sure. Thank you.

Operator

The next question will come from Steven Lichtman of Oppenheimer and Company. Your line is open.

Steven Lichtman -- Oppenheimer & Co -- Analyst

Thank you. Hi guys. For surgical and sports and the strength there this year, the sales force expansion obviously has been a component of that, but certainly there are other drivers. What would you estimate the underlying growth is for that business right now excluding the incremental benefits of the sales force ads?

Gary S. Gillheeney -- President and Chief Executive Officer

So right now, about one-third of our growth is coming from our existing agencies right now, and that additional growth is coming from additional customers and expansion of the market. So we see the growth just excluding the additional agencies in the 10% to 15% range.

Steven Lichtman -- Oppenheimer & Co -- Analyst

Okay, great. And then just secondly on the Vizient contract. Any update there on how many hospitals within that network you added in the quarter and just overall, how that opportunity is playing out for you guys?

Gary S. Gillheeney -- President and Chief Executive Officer

Sure. Actually all of our GPOs are doing extremely well. So with Vizient, as you know, we now have access on our surgical sports medicine business to over 3,100 hospitals. This past quarter, we added over 100 hospitals, approximately 100 hospitals in the quarter and revenue for the Vizient customers are up about 28% for the year. So we're very pleased. Excited about what's happening not just with Vizient but with our other GPOs as well.

Steven Lichtman -- Oppenheimer & Co -- Analyst

Great. Thanks Gary.

Gary S. Gillheeney -- President and Chief Executive Officer

You are welcome.

Operator

[Operator Closing Remarks]

Gary S. Gillheeney -- President and Chief Executive Officer

Thank you.

Timothy M. Cunningham -- Chief Financial Officer

Thank you.

Duration: 38 minutes

Call participants:

Gary S. Gillheeney -- President and Chief Executive Officer

Timothy M. Cunningham -- Chief Financial Officer

Victor Lin -- Credit Suisse -- Analyst

Ryan Zimmerman -- BTIG Research -- Analyst

Steven Lichtman -- Oppenheimer & Co -- Analyst

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