Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Organogenesis Holdings Inc (NASDAQ:ORGO)
Q1 2020 Earnings Call
May 11, 2020, 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 First Quarter 2020 Earnings Conference Call for Organogenesis Holdings Inc. [Operator Instructions]. 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 on 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 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 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 and Chief Executive Officer. Please go ahead, sir.

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Thank you, and welcome, everyone, to Organogenesis Holdings first quarter 2020 earnings conference call. I'm joined on the call today by Tim Cunningham, our Chief Financial Officer.

Now let me start with a brief agenda of what we will cover during our prepared remarks. I'll start with an overview of our revenue performance in the first quarter, including some color on how our business trends have been impacted to date by the COVID-19 pandemic and how we are managing our business to keep us well positioned for growth when the rebound begins. After my opening remarks, Tim will provide you with a more in-depth review of our quarterly financial results as well as a summary of our balance sheet and financial condition, and then we'll open up for questions.

Beginning with a review of the first quarter revenue performance. We reported total revenue growth of 8% year-over-year in the first quarter, driven by sales growth in our Advanced Wound Care products of 7% and sales growth in our Surgical & Sports Medicine products of 13% year-over-year. We were pleased to deliver Q1 growth above the high end of the expected revenue range provided on our fourth quarter call as part of our full year 2020 revenue guidance discussion.

Our first quarter growth performance reflects the continuation of the key drivers of our growth that we've been discussing on each of our earnings calls over the last year. The most important of which are the investments we've made in expanding our sales force over the last 24 months.

We had 275 direct reps at the end of Q1, up 10 reps quarter-over-quarter and representing growth in our direct sales team of 45% since the end of 2017. We also expanded a number of independent agencies we are working with in the Surgical & Sports Medicine market to approximately 165 at the end of Q1 '20 compared to 160 at the end of 2019, which represents growth in our agency partners of more than 83% since the end of 2017.

Sales of our PuraPly products were a key driver of total company revenue growth again this quarter with sales of $32.5 million compared to $25.4 million in Q1 last year, an increase of $7.1 million or 28% year-over-year. We continue to leverage the strong demand for PuraPly by growing the number of PuraPly customers by driving customer and clinician adoption deeper into our existing PuraPly accounts, and we were pleased to see the early progress we're making related to our PuraPly office strategy as well.

Importantly, our reported growth in Q1 does not fully reflect the strong execution of our commercial strategy, which had resulted in strong momentum in our growth trends over the first two months of 2020. Specifically, our sales through February were up 13% year-over-year before slowing dramatically over the second half of March. As the COVID-19 pandemic spread throughout the US in March and federal and state restrictions were initiated, we began to see significant disruptions in our business trends. The disruptions varied across our business given our commercial presence in different sites of care in different regions of the country. But by the end of March, many of our customers had experienced significant disruption in their activities, including shifting resources to emerging care, restricting access to their clinicians and reducing patient treatments or announcing temporary closings as a result of COVID-19 pandemic.

After increasing 13% through February, our sales increased 14% over the first half of March. So the growth trend continued. Then declined 14% year-over-year over the second half of March, resulting in flat growth for the month of March year-over-year. This sales performance for the full month of March was driven by a 2% increase in sales of our Advanced Wound Care products, offset by a 9% decrease in sales of our Surgical & Sports Medicine products. The negative trends we experienced in the second half of March deteriorated further in April as sales declined 29% year-over-year.

Sales of our Surgical & Sports Medicine products declined 52% year-over-year in April given the higher exposure to elective surgical procedures, especially those that are conducted in the hospital setting and sales of our Advanced Wound Care products, which were more resilient, but still experienced a deterioration in the trend compared to late March with sales declining 24% year-over-year for the month of April.

Importantly, though, in recent weeks, we have seen an improvement in trends as some healthcare facilities, depending upon the site of care and depending upon the region in the country, have started to reopen. And while we are pleased with the overall positive trends in states lifting restrictions and the gradual reopening of practices around the United States, we remain very cautious given the high level of uncertainty with respect to the pace of the recovery going forward.

So how has the company responded to this challenge of COVID-19 pandemic. Well, we've acted quickly in response by implementing a number of measures designed to protect the health and safety of our employees and to support our customers and to ensure business continuity. We've also identified cost-saving measures to help mitigate the near-term impact of our financial performance as a result of the slowdown in sales. Where possible, we've implemented effective work-from-home policies that curtailed all nonessential travel. Our manufacturing facilities and supply chains have experienced no disruptions to date. Throughout this pandemic, we have stayed in close contact with our customers and have continued to identify ways to help them navigate the many challenges they are facing during this global pandemic. We've conducted many virtual services and educational seminars to educate our healthcare providers on the benefits of our portfolio. Our sales team remains engaged with customers and is using and leveraging virtual technology to support our customers that are not accessible in person due to the COVID-related restrictions. Safety is our number one priority, and we are doing all we can to continue to provide our lifesaving products to the healthcare providers and patients who need them.

Finally, I want to say I'm proud of how our organization has performed during this period of uncertainty. The resilience and dedication of our team-that our team has demonstrated over the last couple of months is impressive, and I want to thank them for their continued commitment to delivering on our mission to provide integrated healing solutions that substantially improve the medical outcomes, while lowering overall cost of care.

With that, let me turn it over to Tim for a review of our financial results for the first quarter and our balance sheet.

Timothy M. Cunningham -- Chief Financial Officer

Thank you, Gary. I will 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. Revenue for the first quarter of 2020 was $61.7 million compared to $57.1 million for the first quarter of 2019, an increase of $4.6 million or 8%. First quarter revenue results came in above the high end of the revenue range provided as part of our full year 2020 guidance discussion on our fourth quarter earnings call as well as the preliminary revenue range we provided on April 8.

Revenue for Advanced Wound care products for the first quarter of 2020 was $51.3 million compared to revenue of $47.8 million for the first quarter of 2019, an increase of $3.4 million or 7%. Revenue from Advanced Wound Care products represented 83% of total revenue in the first quarter of 2020 compared to 84% of total revenue in the prior year period.

Revenue from Surgical & Sports Medicine products for the first quarter of 2020 was $10.4 million compared to $9.3 million for the first quarter of 2019, an increase of $1.2 million or 13%. Revenue from Surgical & Sports Medicine products represented 17% of total revenue in the first quarter of 2020 compared to 16% of total revenue in the prior year period.

Revenue from PuraPly products for the first quarter of 2020 was $32.5 million compared to $25.4 million for the first quarter of 2019, an increase of $7.1 million or 28%. Revenue from PuraPly products represented approximately 53% of total revenue in the first quarter of 2020 compared to 45% of total revenue in the first quarter of 2019.

As of March 31, 2020, we had approximately 275 direct sales reps compared to 265 at year-end 2019 and approximately 165 independent agencies compared to 160 at year-end 2019.

Gross profit for the first quarter of 2020 was $42.9 million compared to $40.1 million for the first quarter of 2019, an increase of $2.8 million or 7%. Gross profit margin for the first quarter of 2020 was 69.6% of revenue compared to 70.3% of revenue for the first quarter of 2019. The change in gross profit margin resulted primarily from changes in the revenue mix to the prior year period.

Operating expenses for the first quarter of 2020 were $58 million compared to $52.3 million for the first quarter of 2019, an increase of $5.8 million or 11%. The increase in operating expenses in the first quarter of 2020 as compared to the first quarter of 2019 was driven primarily by higher selling, general and administrative expenses, which increased to $52.6 million compared to $48.9 million in the first quarter of 2019, an increase of $3.7 million or 8%. The increase in selling, general and administrative expenses is primarily due to additional headcount, mainly hiring in our direct sales force, higher sales commissions as a result of higher revenue, additional royalties, a portion of which was a cancellation fee for certain product development and consulting agreements and additional credit card processing fees due to increased collections.

The increase in SG&A expenses was offset partially by a decrease in amortization associated with intangible assets amortized using the economic benefits method and a decrease in legal, consulting and other costs associated with the ongoing operations of our business.

R&D expenses for the first quarter of 2020 were $5.4 million compared to $3.4 million in the first quarter of 2019, an increase of $2 million or 60%. The increase was primarily due to additional headcount and investment in clinical programs in our product pipeline. First quarter 2020 R&D expenses were also impacted by additional process development costs associated with a new contract manufacturer for our Affinity product line, which was reintroduced late in the first quarter of 2020.

Total reported operating expenses for the first quarter of 2020 included approximately $2 million of nonrecurring expense, which clouds the strong expense control performance we achieved in the period. Specifically, the $2 million of nonrecurring expense is related to a fee for canceling multiyear agreements that were inherited by the company as part of the NuTech Medical acquisition. Excluding the cancellation fee, the growth in our SG&A expenses was 4% year-over-year in the first quarter. This growth on our SG&A expense reflects our proactive efforts to identify and implement cost-saving measures as a result of the rapidly evolving environment and continuing uncertainty related from the impact of COVID-19.

These cost-saving measures were primarily related to discontinuing all nonessential services and programs, instituting controls on discretionary spending, including travel, events, marketing and temporary delays in clinical spend. We expect the majority of these savings to continue to benefit our near-term operating expense profile, which will help mitigate the financial impact of COVID-19. Specifically, we expect to realize savings of approximately $5 million to $6 million in the second quarter of 2020 compared to our operating expenses in the first quarter of 2020.

Operating loss for the first quarter of 2020 was $15.1 million compared to an operating loss of $12.1 million for the first quarter of 2019, an increase of $3 million or 24%. Excluding the nonrecurring cancellation fee discussed earlier, operating expenses increased 7% year-over-year, reflecting modest leverage of our expenses relative to the 8% increase in revenue in the period.

Total other expenses net for the first quarter of 2020 were $1.2 million compared to $3.5 million for the first quarter of 2019, a decrease of $2.3 million or 66%. The change in total other expenses net for the first quarter of 2020 was driven by a gain of $1.3 million related to the settlement of the deferred acquisition consideration dispute with the sellers of NuTech Medical, offset partially by higher interest expense related to higher borrowings compared to the year earlier period. The change in total other expenses net for the first quarter of 2020 was also driven by a $1.9 million noncash loss on the extinguishment of debt, which impacted the prior period only and was related to the write-off of unamortized debt discount upon repayment of the master lease agreement as well as early prepayment penalties in March 2019.

Net loss for the first quarter of 2020 was $16.3 million or $0.16 per share compared to a net loss of $15.7 million or $0.17 per share for the first quarter of 2019, an increase of $0.6 million or 4%.

Adjusted EBITDA loss for the first quarter of 2020 was $13.1 million compared to an adjusted EBITDA loss of $9.4 million for the first quarter of 2019. We have provided a full reconciliation of our adjusted EBITDA results in our earnings release, Form 8-K and Form 10-Q, all of which were filed with the Securities and Exchange Commission this afternoon.

Turning to the balance sheet. As of March 31, 2020, the company had $46.9 million in cash, $56.6 million of working capital and $110 million of debt obligations, of which $16.9 million were capital lease obligations compared to $60.2 million in cash and $100.6 million in debt obligations, of which $17.5 million were capital lease obligations as of December 31, 2019. The net change in cash of approximately $13 million for the three months ended December 31 -- sorry, March 31, 2020, was driven by $8 million of cash provided by financing activities, offset by $17 million of cash used in operating activities and $4 million of cash used in investing activities during the period.

Cash from financing activities for the first quarter of 2020 was driven by the company's access and funding of the third tranche of its borrowing facility with Silicon Valley Bank, which brought in $10 million in cash on March 20, 2020. As of March 31, 2020, we are in full compliance with the financial covenants under the credit agreement with SVB. At quarter end, we had $60 million in outstanding borrowings under the term loan facility and $33.5 million of borrowings under the revolving facility. The revolving credit facility has up to $6.5 million of additional borrowing capacity in the future, subject to our continued compliance with financial covenants in the SVB agreement. We expect that our cash on hand as of March 31, 2020, plus availability under our SVB credit agreement and cash flows from operations, will be sufficient to fund our operating expenses, capital expenditure requirements and debt service payments for at least the 12 months following our 10-Q filing.

Turning to a review of our 2020 revenue guidance. On April 8, 2020, the company withdrew its previously announced fiscal year 2020 revenue guidance originally issued on March 9, 2020, due to the rapidly evolving environment and uncertainty resulting from the impact of the COVID-19 pandemic. Given the continued uncertainty, we are currently unable to fully predict the impact that the unprecedented COVID-19 pandemic will have on the company's financial position and operating results.

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

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Thanks, Tim. Despite the disruption in the business trends as a result of the COVID-19 pandemic, the long-term outlook for growth and market share gain remains compelling, fueled by the investments we've made in our commercial team; new products; line extension, including our recent relaunch of Affinity; and our growing portfolio of clinical evidence. And we believe we have a strong commercial strategy and our continued success in executing this strategy will result in strong adoption and utilization of our product solutions for both the Advanced Wound Care and Surgical & Sports Medicine markets, as the broader economic and public health environment improves. So we look forward to speaking with the investment community in the future and appreciate your interest in Organogenesis.

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

Questions and Answers:

Operator

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

Matthew Miksic -- Credit Suisse -- Analyst

And congrats on a pretty solid quarter given the environment, especially. Wanted to just -- maybe one of the things we're all trying to do, including maybe folks that corporates and companies that we cover, is trying to understand how different companies and product lines and end markets are experiencing what seems to be the early stages of a sign of a recovery, let's call it. And I'm curious you mentioned, Gary, in some of your remarks about pockets of the country and types of centers that are starting to show some encouraging signs of improvement here after a tough April. Love it if you could maybe give some examples across your product lines and maybe across different types of geographies where you're seeing different things? And I have one follow-up.

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Sure. Well, we look at capacity. As we all know, this is not a demand issue, it's a capacity issue. And capacity on the Surgical & Sports Medicine has opened up around 80%, 82%. And fortunately, for us, we have a lot of rural hospitals that we do business in. So if you look at historically where our Surgical & Sports Medicine sales have been for the states that are open now, that covers about 96% of our Surgical & Sports Medicine business. So we're seeing some pockets of the country where it's almost business as usual and other areas and more metro areas, where we're seeing more of a constraint.

The other thing that's important for us is about 45% of our sales are non-elective. So we're not as exposed as some other surgical sports medicine companies, and we have a fairly high concentration of sales, almost 75% of our sales are in nonmetropolitan areas. So I think that's collectively why we've probably done a little better than what others have experienced.

Well, on the wound care side, we had about 70% of the wound care centers were open for business, but very few, about less than 10% were accepting new patients. We're now seeing about 80% of the centers open and more than half of them are accepting new patients. And we're also seeing about 30% of those centers now allowing our reps to go into those centers. And at the beginning of the pandemic, it was less than 10%. So we're seeing the centers opening up. We're seeing our reps slowly being able to enter those facilities as well as the nonmetropolitan areas are ramping up much faster for us. Hopefully, that's helpful.

Matthew Miksic -- Credit Suisse -- Analyst

That's super helpful. Yes, very, very helpful. Any sense of the types of procedures, types of wound care procedures? I know it's kind of putting a fine point on it. But we had-there were some other companies in the space that have talked about pushing some of these patients off to home care with sort of, call it, suboptimal or just sort of more traditional wound care options for those patients who might have otherwise been given sort of a more advanced product in a setting given the persistence of their wound. Any-first of all, have you seen that pendulum swing one way and is it swinging back? And secondly is, how do you products tend to fit into the types of patients that are maybe being pushed out or asked to stay home or the type of patients that are actually being recommended that they come in and get treated?

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Sure. Well, we're definitely seeing patients that really require an advanced modality like ours being pushed off. And I think in some areas, clinicians have been allowed through a reimbursement change at CMS to apply skin substitutes in the home, so we've seen a little bit of that to help offset the need for these folks to get a skin substitute in the wound care center. Clearly, we've seen the push off of patients that are requiring those procedures. We're now seeing a backlog of those patients and wound care centers that are opening and now trying to schedule those patients in priority order, meaning those that need the skin substitutes in advanced modality are getting pushed into the centers more quickly than others. So we expect to start seeing the results of that over time.

Matthew Miksic -- Credit Suisse -- Analyst

That's very helpful. I'll stand back in [Phoentic] queue. Thanks very much for the color.

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Sure.

Operator

[Operator Instructions]. Next question comes from the line of Ryan Zimmerman from BTIG. Your line is open.

Ryan Zimmerman -- BTIG -- Analyst

Thank you. Thanks for taking questions, Gary and Tim. A follow-up to Matt's question there. In line with what you're talking about in terms of pushing patients out, we've also heard from some of the competitors that this might result in more acute wounds being treated. And so I'm just wondering kind of what that does from a product mix standpoint if patients are being held off from going in the clinic right now and their wounds do persist and they become more acute. How does that impact you guys when they do return? Number one.

And then the second question, you talked a little bit about a PuraPly office strategy, and I was wondering if you could elaborate about that a little bit more what you're entailing there. And what that-what the net result of that could be?

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Sure. Let me start with the PuraPly office strategy. We have mentioned on previous calls that we did have a unique PuraPly offering in the office. We've had an improvement in our ASP. We have additional sizes. So it's a unique office offering that's specifically designed for office-type patients. And to date, we've seen an actual doubling in the number of offices that are utilized in PuraPly. So that strategy has worked very, very well for us. And we continue to see growth, not only in the office as well as in the actual number of units that we're selling within those offices.

Regarding the size and the delay of the wounds, you're absolutely right. What we're seeing now is that wounds are bigger, wounds that are more infected. So we're seeing-and we expect to see more PuraPly sales because these wounds are coming in and they're infected. And if you look at the average size of the products that we're selling, particularly with PuraPly and even with NuShield, they are larger sizes, which tells us that the wounds are larger and have gotten worse. So we expected that. It's unfortunate. And that backlog that I talked about that have been pushed off at home and even using telemedicine kinds of office visits are now being prioritized to be brought in earlier, and we expect to see PuraPly being aggressively applied and then followed by larger pieces of our product.

Ryan Zimmerman -- BTIG -- Analyst

And then just one for Tim. I just want to squeeze this in. Tim, you called out credit card processing being up in the quarter. I'm wondering if that's a change in behavior from historic patterns at clinics. And was there any stocking up, so to speak, ahead of maybe the pandemic from physicians as a result of the increase in credit card processing that you saw?

Timothy M. Cunningham -- Chief Financial Officer

No. I mean, I don't think there's any real discernible trends, Ryan. It's just the growth of the business. We haven't seen a lot in distress among our customer base and the ability to pay. So I don't think there's a discernible trend in that. We just call it out the expense itself.

Ryan Zimmerman -- BTIG -- Analyst

Got it. Thank you Tim.

Timothy M. Cunningham -- Chief Financial Officer

Sure.

Operator

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

Steven Lichtman -- Oppenheimer -- Analyst

Thank you. Hi guys. I guess a lot of us are trying to figure out the catch-up effect of deferred procedures. And so wondering if you can ballpark for us, what percentage of your business you think is related to traumatic wounds such that-because the activity is not happening, those wounds aren't happening, therefore, obviously, we shouldn't be building that in as a sort of catch-up down the line. Is that something that you're able to ballpark for us at all?

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

I can tell you that 45%, as I mentioned earlier, are nonelective procedures. A reasonable percentage of those are traumatic, kind of acute surgeries. But we don't specifically disclose exactly the types of procedures and what percent of our business is specific procedure related.

Steven Lichtman -- Oppenheimer -- Analyst

Okay. And so as you're thinking about the decline in the business here, acutely near term, are you-should we assume that we don't know when, of course, but over a period of time that most of that comes back? Or just qualitatively, do you think that there's a portion we should not be expecting to come back simply because again activity is down overall and traumatic injury may be down?

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Yes. I think our view is about 85% of the backlog will get-will eventually end up getting taken care of. We think it will probably take four months to five months for that backlog to work its way through the system. So that implies about a 15% of that lost revenue perhaps wouldn't come back.

Steven Lichtman -- Oppenheimer -- Analyst

Got it. And then just quickly on-you mentioned expenses down due to clinical activity being down. Was that you sort of proactive in terms of sort of cost savings offsets? Or is it because centers are just obviously down and you can't do those clinicals? And does it have any impact on any of the PuraPly extensions that we've talked about?

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Yes. What it really relates to is, it is proactive, for sure as well as not having access to clinical availability in the hospital. But primarily, it's cost savings that's proactive by slowing down the RENEW trial to save funding. That's a lot of upfront costs that aren't necessarily related to being in the hospital, but we do have a NuShield trial, as an example, that we've had to put on hold because we do have challenges of getting patients into the hospital and getting them treated as part of the trial. So it's a combination of both, but the majority of the cost savings has been proactive.

Steven Lichtman -- Oppenheimer -- Analyst

Okay. Thanks guys.

Operator

[Operator Instructions]. Your next question comes from the line of Richard Newitter from SVB Leerink. Your line is open.

Richard Newitter -- SVB Leerink -- Analyst

Hi. Thanks for taking the questions. I wanted to just start off with the -- I think, Gary, you had mentioned that 30% of the centers that are open for business now or at least the wound care centers that are opening for business and accepting new patients, that 30% of them are allowing reps in. I was just wondering what are the criteria there? How fast is that ramping? And I'm kind of curious to know how important that is for you with some of the new product launches? Is Affinity the type of product that once it's available, folks who are familiar with that product, they just start ordering it? Or do you need the rest in there?

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Yes. A couple of things. One is, I think it depends on the region of the country, obviously, and the experience with COVID cases is pretty much how the wound care centers are opening up. So there's really no rhyme or reason to it. It's different based on geography. It's that simple.

On the Affinity side, Affinity is being launched right now in the office, and many offices are open. They need to be open. It's their bread and butter. So reps are allowed to go in and talk to many of the office clinicians about Affinity. Our launch also is focused on clinicians that have used Affinity in the past. So we're relaunching with all our previous users, so that doesn't require a lot of education. And the fact that we are in the office right now and haven't really attacked the wound care centers with Affinity makes it much easier for us.

The other thing that I would say is, to credit to our commercial team, is we've been in contact with over 95% of our customers virtually or in person and multiple times a month and doing educational programs, webinars, speakers training, helping them manage their practice differently. So we've had a lot of time and a lot of connections with our customers, even though it's been virtual. So that's been very, very helpful, and we expect that to affect our ramp when those patients eventually start moving back in.

Steven Lichtman -- Oppenheimer -- Analyst

Great. And maybe, Tim, anything you can provide for us in terms of the P&L margin and gross margin, in particular, as we try to model what's clearly going to be a revenue decline in the second quarter? Can you give us any helpful advice on the degree of deleveraging that might take place or gross margin impact, rather?

Timothy M. Cunningham -- Chief Financial Officer

Sure. No. In Q1, we had a bit of pressure on gross margin with some of the pre-the work done on Affinity to get it into the market. And on an OpEx basis, as we discussed in our prepared remarks, we've really affected some slowdown in spend and some cutting out of various different areas. So we have delayed some hiring, not in our sales force for the most part, across other parts of the company. We've affected marketing programs going from in person to online. Travel, much, much restricted. And some of the clinical programs Gary referenced that we've delayed or deferred for now and things that naturally change with the drop in revenue, like commissions and royalties. So we said at this current quarter, Q2, we see that to be $5 million to $6 million in OpEx savings.

Operator

Our next question comes from the line of Matt Miksic from Credit Suisse. Your line is open.

Matthew Miksic -- Credit Suisse -- Analyst

Hi. Just wanted to circle back on a topic. I know we're all so focused on COVID-19 and Q1 and Q2. But I did want to sort of check in just to get a sense of what the steps are, key steps, which I'm sure you're all sort of focused in thinking about in addition to what's happening right now is the transition into Q3 and Q4 on PuraPly. Any key sort of milestones or activities that might be affected by the current environment? Or maybe just an update as to how you expect that to play out in terms of progression of new products or steps that you're taking in preparation for the expiration of the pass-through?

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Sure. Well, if you recall, part of our strategy with PuraPly post pass-through was to have a much larger office presence, having more sizes, so we can treat more wounds. Many of those wounds, we didn't have sizes for the first time we came out of pass-through. We have a higher reimbursement in the office. We expected that. We've achieved that. So -- actually, the pandemic has pushed procedures from the outpatient setting into the office. So we've seen a significant increase in that move from the outpatient center to the office happening. That's consistent to where we're going. It just seems to now be happening faster. Fortunately, we have the portfolio, and that was part of our strategy, is follow the patients into the office. And we think, ultimately, patients will also move more to home care. That seems to be the direction of healthcare. So it's kind of helped from that perspective. And that's a big part of the strategy we have.

The launching of other products, where we relaunched Affinity. So we're comfortable with that. We've launched XT. So that's moving forward. And we expect MZ to be out in the second half, I believe, of 2020. So the product launches are going forward. The only thing that really concerns us a bit is we have a lot of clinical data for PuraPly. And we have a lot of presentations that we were expecting at SAWC and other conferences. And the fact that those conferences are not happening and we now have to do it virtually, we wonder about the impact, and we're going to have to be more aggressive in making sure we get that clinical data out there to support the brand. So that would be the only thing right now that is concerning to us, as it relates to PuraPly other than the overall economic impact of some of the hospitals, as we pull out of this pandemic that there aren't significant reductions in capacity as a result of hospital closures or something like that. But actually, the move to the office has been helpful, but the ability to present and get our clinical data out there to support the brand is a bit of a concern.

Matthew Miksic -- Credit Suisse -- Analyst

Got it. Thank you Gary.

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Sure.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Gary S. Gillheeney, Sr. -- Director, President and Chief Executive Officer

Timothy M. Cunningham -- Chief Financial Officer

Matthew Miksic -- Credit Suisse -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

Steven Lichtman -- Oppenheimer -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

More ORGO analysis

All earnings call transcripts

AlphaStreet Logo