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Organogenesis (ORGO 0.91%)
Q1 2024 Earnings Call
May 09, 2024, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome, ladies and gentlemen, to the first quarter of fiscal-year 2024 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 report and its subsequently filed 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 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 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 S. Gillheeney, Sr., Organogenesis Holdings' president, chief executive officer and chair of the board. Please go ahead, sir.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Thank you, operator. And welcome, everyone, to Organogenesis Holdings first quarter fiscal-year 2024 earnings conference call. I'm joined on the call today by Dave Francisco, our chief financial officer. Let me start with a brief agenda of what we will cover during our prepared remarks.
I will begin with an overview of our first-quarter revenue results and an update on our key operating and strategic developments in recent months. Dave will then provide an in-depth review of our first quarter financial results, our balance sheet, financial condition at quarter end, as well as our financial guidance for 2024, which we reaffirmed in our press release this afternoon. Then I will share some closing thoughts before we open the call for your questions. Beginning with a review of our revenue results for Q1.
Our sales results came in above the high end of the guidance range outlined on our fourth quarter call, reflecting a continuation of the positive momentum in business trends in early 2024 that we discussed on our call at the end of February. 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 believe our first-quarter results support our confidence that we focused our commercial team on the right strategy to navigate this challenging operating environment. We are encouraged by the evidence that the commercial support programs we implemented to enhance our existing customer relationships regained lost accounts and to drive growth in our customer base by emphasizing our differentiated products, and that clinical validation are continuing to prove effective.
Turning to an update on our progress on our ReNu program. Our ongoing Phase III clinical trial evaluating the use of ReNu for the management of symptoms associated with knee osteoarthritis have continued to progress favorably in recent months. Last week, we announced top-line results from our first Phase III clinical trial to evaluate the safety and efficacy of ReNu for the management of symptoms associated with knee osteoarthritis. The top line data was positive, and the primary endpoint was achieved with a p-value of 0.0177.
The study demonstrated a statistically significant reduction in knee OA pain at 6 months as assessed by the Western Ontario McMaster University arthritis Index pain scale compared to the subjects treated with saline control. In addition to improving knee OA pain symptoms, ReNu maintained patient function compared to saline control with a p-value of less than 0.0001. ReNu showed a favorable safety profile, which is consistent with our prior studies. If approved, we believe introducing ReNu to a large and growing pain management market represents a transformational opportunity for Organogenesis.
If approved, introducing ReNu as an innovative pain management solution for the millions of patients suffering from knee OA represents a significant new addressable market opportunity for Organogenesis. Specifically, by 2027, an estimated 34.4 million Americans are expected to be affected by knee OA. While there is no known treatment that completely cures knee OA, it is possible to treat disease symptoms with the goal of avoiding or delaying costly and invasive knee replacement surgery. We believe ReNu, if approved, will address an unmet clinical need for all patients suffering from moderate to severe symptomatic knee osteoarthritis, and we are particularly excited about the unique opportunity for ReNu to serve the most severe knee OA patients who have limited nonsurgical options, representing an estimated 5 million Americans.
If successful, ReNu would be the only FDA-approved biologic intra-articular injection to improve pain symptoms even in the most severe cases of knee OA. By way of reminder, 30% of the enrolled patients in the first Phase III trial were of the most severe knee OA patient population, also known as KL 4s. Based on the positive results of this clinical trial, along with our accumulated safety and efficacy data from our published 200-patient RCT and ReNu's RMAT designation for knee OA, we intend to request a meeting with the FDA to discuss the clinical data requirement for a Biologics License Application file. Our team is targeting completion of data analysis by the end of May, and we look forward to sharing further information shortly thereafter on ReNu's performance in this important Phase III prospective double-blinded, multicenter, saline control, parallel group clinical trial of 515 patients.
We are also pleased with the notable progress we are seeing in our second Phase III trial. We continue to see momentum in the pace of enrollment, and our current timeline has us achieving full enrollment by the end of the year, well ahead of our original expectation when we started enrolling patients in this study last September. Before turning the call over to Dave, I wanted to share a few thoughts on recent developments in the area of Medicare reimbursement and coverage. On April 25, a collaborative proposed LCD was published by seven medicare administrative contractors.
The proposed LCD addresses skin substitute grafts, cellular, and/or tissue-based products for the treatment of diabetic foot ulcers and venous leg ulcers in the Medicare population. As outlined by CMS, the LCD was issued to make sure that Medicare covers and people with Medicare have access to skin substitute products that are supported by evidence and that show they are reasonable and necessary for the treatment of diabetic foot and venous leg ulcers in the Medicare population, and that coverage aligns with professional guidelines for appropriately managing these wounds. The proposed LCD also calls for limiting the applications to four per case as well as including allowances for additional treatment applications in cases where medically necessary. We applaud CMS and the MACs for continuing to prioritize coverage with demonstrated clinical efficacy for skin substitute product.
We have been pushing for reform for many years and believe this proposed LCD represents a substantial step forward toward cleaning up the marketplace. Importantly, we are confident that Organogenesis will be well positioned to gain market share now and in the future. The proposed LCD includes 15 covered skin substitute products, which the MACs believe have the requisite published, peer-reviewed clinical evidence to support reimbursement. Importantly, the proposed LCD also includes a list of approximately 200 skin substitutes that are currently sold in the market today that have been designated as noncovered.
Two of our commercialized brands are included on the proposed LCD covered list, Apligraf and Affinity, the latter of which is the only living amniotic offering on the covered list. We have four commercialized brands, PuraPly, NuShield, Novachor, and CYGNUS, that were designated as noncovered as part of the proposed LCD. We have a strategy to leverage existing strong clinical and real-world data, including RCTs and have already initiated new RCTs to secure additional clinical evidence. We expect to have compelling cases to present to the MACs to secure coverage for additional products on the covered list later this year and into next year.
We strongly believe these material changes from CMS and the MACs in reimbursement of skin substitute, if ultimately adopted, will be positive for the long-term health of the wound care market. While there will be a period of transition and disruption if these sweeping changes are implemented, we believe that Organogenesis' strong brand equity, established commercial infrastructure and a plan to establish additional clinical validation to secure coverage of key commercialized products, which taken together, represent a substantial competitive advantage for us that has us well positioned to maximize the enormous opportunity to serve more patients with our highly innovative and highly efficacious products. With that, I'll turn the call over to Dave.
Dave Francisco -- Chief Financial Officer
Thanks, Gary. I'll begin with a review of our first-quarter financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net revenue for the first quarter was $110 million, up 2%.
As Gary mentioned, these results were well ahead of expectations we provided on our fourth quarter call, which called for a total first=quarter revenue in the range of $98 million to $104 million as we experienced strong momentum building at the end of February that carried into March. Our Advanced Wound Care net revenue for the first quarter was $103.9 million, up 3%. And net revenue for Surgical & Sports Medicine products for the first quarter was $6.1 million, down 9%. Gross profit for the first quarter was $81.3 million or 73.9% of net revenue compared to 75.3% last year.
The gross margin was impacted year over year, primarily due to shifts in product mix compared to the prior year period. Operating expenses for the first quarter were $85.1 million compared to $85 million last year, an increase of $0.1 million or less than 1%. The year-over-year change in operating expenses in the first quarter was driven by a $1.5 million or 2% decrease in selling, general, and administrative expenses, offset by a $1.6 million or 14% increase in research and development costs compared to the prior year period. Operating loss for the first quarter was $3.9 million compared to an operating loss of $4 million last year, a decrease of $0.1 million.
Net loss for the first quarter was $2.1 million compared to a net loss of $3 million last year, a decrease of $0.9 million. Adjusted net loss for the first quarter was $1.4 million compared to $0.7 million last year, an increase in adjusted net loss of $0.8 million. As a reminder, adjusted net income is defined as GAAP net income adjusted to exclude the effects of amortization and other certain items and resulting income taxes on those items. Adjusted EBITDA for the first quarter was $2.6 million or 2.3% of net revenue compared to $3.8 million or 3.5% of net revenue last year.
We have provided a full reconciliation of our adjusted net income and adjusted EBITDA results in our earnings release. Turning to the balance sheet. As of March 31, 2024, the company had $89.3 million in cash and cash equivalents and restricted cash and $64.9 million in debt obligations. That compared to $104.3 million in cash, cash equivalents and restricted cash and $66.2 million in debt obligations as of December 31, 2023.
We also have up to $125 million of available borrowings on our revolving credit facility as of March 31, 2024. Turning to a review of our 2024 financial guidance. Despite strong momentum that we are experiencing in the business, we are reaffirming our prior guidance that we referenced in our press release this afternoon to account for the potential near-term disruption in the market that we expect from the LCDs. For the 12 months ended December 31, 2024, the company continues to expect net revenue 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%; net revenue from Surgical & Sports Medicine products of 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 net loss to net income of $4.6 million and adjusted net income loss in a 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 to $35 million. For modeling purposes, we expect the second quarter revenue in the range of approximately $120 million to $125 million.
Note that all modeling considerations outlined in the fourth quarter call remain largely unchanged. With that, I'll turn the call back over to Gary for some closing remarks.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Thanks, Dave. As a market leader, I'm confident that the MACs' prioritization of demonstrated clinical efficacy will strengthen our competitive position over the long term. Additionally, our ReNu program continues to exhibit significant promise to provide clinically meaningful benefits to millions of patients suffering from knee OA symptoms. And our intention this year is on developing a clear regulatory path, supported by robust safety and efficacy data.
If approved, introducing ReNu as an innovative pain management solution for the millions of patients suffering from knee OA represents a significant new addressable market and a transformational opportunity for Organogenesis. I am very pleased with our advancements and the execution on our priorities that ultimately will allow us to deliver on our mission to provide integrated healing solutions that substantially improve outcomes while lowering the overall cost of care. With that, I'll turn the call over to the operator to open the call up for your questions. Thank you.
Questions & Answers:
Operator
Thank you, sir [Operator instructions] And our first question will come from Ryan Zimmerman with BTIG. Your line is now open.
Ryan Zimmerman -- BTIG -- Analyst
Good afternoon. Can you hear me OK?
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Yes, yes.
Dave Francisco -- Chief Financial Officer
Yes.
Ryan Zimmerman -- BTIG -- Analyst
All right. Great. Congrats. Nice to see the results this quarter.
I want to ask a little bit about guidance first, a couple of components to it. So Dave, just to confirm, the guidance today includes the impact of the proposed LCD. And if I look at the way you're setting it up based on the second quarter, it would suggest second-half '24 maybe lower in total sales versus the first-half '24. And I assume you're kind of factoring that in from the impact of the LCDs.
And I just want to kind of get your thoughts around how that plays out, whether that's all in the third quarter and you expect that disruption in the third quarter. Or you expect that to carry into the fourth quarter, just so we all kind of have an understanding around pacing.
Dave Francisco -- Chief Financial Officer
Yeah, sure. I think it's unclear as to exactly when this will be enacted. And so from our understanding, we think it will be the late Q4 or maybe even to January of 2025. So what we learned last year when this happened is the customers started to pull back ahead of the enactment date.
And so whether it's January or whether it's earlier than that in Q4, we just wanted to make sure that we had some leeway there. We obviously beat fairly handily in Q1 and wanted to have some cushion into the back half. But our expectation is that would be disruption that we would experience in the fourth quarter.
Ryan Zimmerman -- BTIG -- Analyst
OK. Very, very clear and very helpful. Two other questions for me. One, can you just talk about, Gary, kind of what products really kind of bounced back this quarter? What you saw on trends? As you kind of put that impact to competition from last year's LCD behind you this quarter, certainly nice to see what stood out from a product perspective that worked.
And then the last question I'll just ask now is just on ReNu. It looks really good top line data coming out of last week. Just curious to get your thoughts around kind of that responder rate versus maybe some of what we've seen with like other products in the market, like Cingal, and kind of how you think about the benefits of amniotic suspension versus traditional HA. Thanks for taking the questions, guys.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Sure. So I think what was really exciting for us is the number of accounts. And I'll get to the products, Ryan, to answer your question. But the number of accounts that we were able to bring back, particularly as you get into February and March really started to accelerate and the number of units of product that we were able to sell.
So that was probably the most exciting thing for us. Clearly, our amniotic products did extremely well. Our new product with CYGNUS did extremely well. We launched that product at our national sales meeting, and it definitely had a strong impact on the quarter.
But fundamentally, the accounts and the number of customers that we brought back really started to accelerate. On the ReNu side, I think what's exciting for us is when you look at HA, some of the historical data, the nonresponse rate is pretty high for HA products, up to 40%. And we haven't seen that in our amniotic suspension technology. Obviously, the p-value is extremely strong, which indicates that the response rate was significantly higher than what you would see in typical HA.
But until it's completely finalized, we really don't have a strong comparison really to discuss. But I think the response rate in our product clearly demonstrated in this study was very strong.
Ryan Zimmerman -- BTIG -- Analyst
Thank you.
Operator
Thank you [Operator instructions] Our next question comes from Ross Osborn with Cantor Fitzgerald. Your line is now open.
Ross Osborn -- Cantor Fitzgerald -- Analyst
Guys, congrats on the quarter. So maybe starting off on the products that were not on the covered list. Would you be able to walk through by product where you stand in terms of current data and where you think you'll need to collect more to get those on the covered list. Thank you.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Yeah, sure. So we have a very strong RCT for our NuShield product that's completed, ready for publication. And our expectation is that we will have that product ready, the publication ready for submission and our comments. We also have a significant amount of real-world data for PuraPly, some of which has not been seen by CMS.
We have an extremely large study with PuraPly, over 1,500 patients, very powerful. So we'll be submitting that with comments. And we've also initiated already studies with PuraPly AM and PuraPly XT. So we expect those studies will be coming along.
Ross Osborn -- Cantor Fitzgerald -- Analyst
OK. Great. And then maybe following the proposal, have you seen any attrition in your sales force? And then just kind of current plans around where you stand in terms of your comfort level, which is to the 5-year sales force.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Well, it's interesting. We did see some attrition early on in the first quarter and then it started to stabilize. Actually, the LCD change will probably continue to stabilize the sales force for obvious reasons. There's not a lot of products out there available in the market.
And we certainly have our two products that we're pretty excited about in the market. So we think it actually will stabilize. We've actually already received calls from sales representatives from other companies already looking for opportunities. So I think the stabilization will continue for the rest of the year.
And we do expect to add reps during the year. We'll probably pace that a bit as we see how this LCD continues to roll out and ultimately finalizes. But our expectation is we will stabilize and continue to add reps probably more so in the back half of the year.
Ross Osborn -- Cantor Fitzgerald -- Analyst
OK. Great. And then last one for us. Would you be able to share the percent reduction from baseline on the WOMAC same-score basis at 6 months?
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
No. It's not -- we don't have that data set available.
Ross Osborn -- Cantor Fitzgerald -- Analyst
OK. Got it. Thanks for taking our questions.
Operator
Thank you. [Operator instructions] Our next question comes from Drew Ranieri with Morgan Stanley. Your line is now open.
Drew Ranieri -- Morgan Stanley -- Analyst
Hi, Gary. Hi, Dave. Thanks for taking the questions. Gary, maybe just for you to start with.
We've been getting a few more questions recently on maybe expectations for the upcoming proposed PFS coming up in July. I mean we've talked before about CMS wanting to move to a bundled payment. But I think it might be helpful for -- maybe for you to kind of reflect on what might happen if that is the case, if it does move to a bundled payment. I mean if we look back to when the hospital settings shifted over a decade ago, I think ORGO at the time was a one-product company.
I mean a lot has changed over the last decade plus. So maybe just how should investors kind of think about the potential impacts? Or any type of framework to think about what a bundled payment might mean for you and for the business on top of maybe this proposed LCD.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Sure. So I think the bundle payment system is probably the kind of the final step in really putting the final pieces of controlling and managing this market. So it will allow for, I think, a more clinically focused market. We won't have the large swings in ASP that you see out there now.
So from that perspective, having a clinical focus, which is where we like to compete, we think is very positive from our perspective, and I think positive for the space. So that step in the process, which may not happen in 2025 with all of these changes, it may move to '26 or some other period, we don't know. But it clearly is another piece that's necessary to actually control the spending in this space. And it will make the bar higher to get into the bundle.
And right now, that bar isn't very high to get on the market. It will make it a little bit higher, both clinically and from a pricing perspective. Those products are going to have to be priced in the market and not really drive the market or disrupt the market. So from that perspective, I think the bundle is an important piece.
Now it needs to be structured appropriately to provide access, so we're not eliminating patient access. So there's some thoughtful design that needs to go into it. But structurally, it's an important piece.
Drew Ranieri -- Morgan Stanley -- Analyst
Got it. I appreciate the color there. And maybe just on ReNu to ask maybe kind of next steps and milestones. I heard that you're -- by the end of May, you're looking to complete the data analysis.
Can you maybe just give a date or time frame in mind for FDA meeting and kind of the path forward of whether a -- the second Phase III would be required or not. Just trying to get a better sense of how you're thinking about approval, commercialization and kind of really building some commercial momentum maybe into approval. Thanks for taking the questions.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Sure, Drew. So our expectation is that we're going to be requesting a meeting around June 3. We expect that we would have a meeting. I believe there's a 60-day requirement to establish that meeting.
So sometime early August that we would be meeting with the FDA. And then they have, I believe, 30 days to actually summarize the meeting and the meeting minutes. If that schedule holds by the end of September, we would probably be able to announce the results of that meeting. And we'll have a better sense on whether we move forward with one study or two studies.
If we move forward with two studies, I think as we said before, our expectation is we'd be submitting the BLA in Q2 of '26 with expected approval in Q2 of '27. If we're successful in only needing one study and perhaps an interim analysis of the second study, we would cut 1 year off of those time lines. So Q2 of '25 and commercializing in Q2 of '26 with, again, that one study, or one study and an interim analysis of the second study.
Drew Ranieri -- Morgan Stanley -- Analyst
Got it. Thank you so much.
Operator
Thank you. We are currently showing no remaining questions in the queue at this time. That does conclude our conference for today. Thank you for your participation.
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Thank you.
Duration: 0 minutes
Call participants:
Gary Gillheeney -- President, Chief Executive Officer and Chair of the Board
Dave Francisco -- Chief Financial Officer
Ryan Zimmerman -- BTIG -- Analyst
Ross Osborn -- Cantor Fitzgerald -- Analyst
Drew Ranieri -- Morgan Stanley -- Analyst
