Organogenesis Holdings Inc. (ORGO) Earnings Call Transcript & Summary

Good afternoon, everyone. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosures website at www.morganstanley.com/researchdisclosure. If you have any questions, please reach out to your Morgan Stanley sales representative. Thank you all for joining the session today. My name is Jonathan Guskind, Executive Director in Morgan Stanley's Investment Banking Group. I would like to thank you all for joining us here for the continuing coverage of day 3 of the Morgan Stanley Healthcare Conference 2020. It's my pleasure to have with us here Organogenesis and the company's Chief Executive Officer, Gary Gillheeney; and Chief Operating Officer, Patrick Bilbo; as well as Interim Chief Financial Officer, Henry Hagopian. To start this off, I will ask Gary to provide a brief company history and high-level overview of the business. We will then jump into Q&A. With that, the floor is yours, Gary.

Thank you, Jon, and good afternoon, everyone. Organogenesis has been around for a long time. Actually, the company was formed in 1985 based on technology spun out of MIT and the company was a primary research organization all the way to 1998 when it launched its first product called Apligraf, which was the first product ever approved by the FDA that was manufactured living and ship living and today still is the only product in Advanced Wound Care that enjoys 2 PMA approvals, one for the venous leg ulcers and one for diabetic foot ulcers. So it really created the skin substitute market and Organogenesis was at the beginnings of the regenerative medicine market as well. Today, we participate in 2 large markets, Advanced Wound Care, which has been in our heritage, which is a large market; and Surgical & Sports Medicine, both large markets. We sell into 7 -- excuse me, 12 different sales channels within those 2 markets. Those markets are underpenetrated and growing in the subsegments that we participate in directly are the fastest-growing subsegments of the broader markets. We have 9 products. We have the most differentiated and comprehensive suite of products in the markets we serve. We have a significant research and development infrastructure. It's our heritage. We have a large pipeline. We have 7 products today that we expect to be launching over the next 2 years. We have a lot of clinical data, over 200 publications supporting our technology, and we have 15 ongoing studies right now supporting our current products as well as our pipeline products, and over 3,000 patients have been studied using our products. Our infrastructure is well established. It's scalable. We service over 3,200 health care facilities today. Our footprint is large, over 450,000 square feet of research and development, product development, manufacturing and logistics space. We have a large commercial infrastructure. We have 285 direct sales reps supporting our Advanced Wound Care business and 160 agencies. Think of an agency as 2 to 3 sales reps supporting our Surgical & Sports Medicine Business unit. So large commercial coverage. Our business has been growing rapidly. Our revenue over the last 12 months through June was $270 million, that's up 14%. Gross margins are 71% today, with the expectations that they'll be in the high 70s and 80%. And we have numerous growth drivers for the organization going forward. We have organic end market growth. We have new product introductions. And with the size of our manufacturing footprint, we have significant manufacturing synergies and efficiency opportunities as well as additional in-licensing opportunities as well because of the size of our commercial infrastructure and the value of that commercial infrastructure in the markets that we serve. The company management team has over 120 years of collective regenerative medicine experience and 104 years at Organogenesis, so a very stable experienced team. The company went public in 2018 through a reverse merger SPAC, and we've been public since. In the 6 quarters that we've been public, we've beat and raised consensus revenue estimates every quarter. And in quarter 2, the company actually grew about 6% in quarter 2 amidst the pandemic, one of a handful of companies that actually had growth, not only year-over-year growth, but sequential quarter growth in Q2. So the company has performed extremely well since we've been public, and that's who we are. And Jon, I'd be happy to answer any questions.

Great. I would like to spend some time on the continued recovery of the business, as you just mentioned, as it relates to the COVID-19 pandemic. I think, as you previously stated in your Q2 earnings, April saw a pretty steep decline in sales of around 29%, while May and June saw a very nice rebound of somewhere in the mid-20% year-over-year. Can you talk about how that recovery has continued through today and what you were seeing in your various business lines?

Sure. It's continuing to improve. We did grow 24% in May and June in both business units, Advanced Wound Care as well as Surgical & Sports Medicine. That trend continued in July. It's also significantly improved in August, and we're seeing the same trend in September. And part of that trend reflects our strategy of moving our Advanced Wound Care business, a significant portion of it into the office. We've been studying and moving our business toward the office as we see claims data moving to the office as the trend goes from inpatient to outpatient, outpatient to the doctor office and even to the home, and we've been seeing that trend for the last 2 years. We've built our office infrastructure and product offerings to support the office. And during COVID, the move to the office was significant. Our goal at the beginning of the year, pre-COVID, was to get our office-based business up to about 43% of our Advanced Wound Care business. We started the year at 18%. We wanted to get it to 43% to 45% by 2022. We exceeded that in Q2. So that trend of patients and wounds moving into the office has been accelerated during COVID, and that trend helped us significantly in Q2 and will help us as the years go on because we think that trend is going to stay and continue to mount.

Great. I think it would be helpful if you could walk us through the market size and expected growth rates for both the Advanced Wound Care and Surgical & Sports Medicine market. So [ you touched ] on it earlier on the call that they're both large and attractive end markets, but putting a little more detail around that would be helpful.

Sure. The Advanced Wound Care market is about a $9 billion market worldwide. The broader market is growing in the mid-single digits, 6% to 7%. And the market's broken up into 4 segments, basically, advanced wound dressings like films, foams, hydrocolloids, negative pressure. And then Biologics, and we compete in the biologic area in the Skin Substitute subsegment. So the Skin Substitute segment is growing at about 15%. So the broader market growing at about 6% or 7%, the Skin subsegment growing at about 15%. And the amniotic technology is growing at close to 20% within that space. So very fast-growing subsegment and the technology that we have is also the fastest-growing technology. But what's really interesting about this space is only 5% of wounds that require an advanced modality like ours actually are getting the advanced modality. So the underpenetration of the market is significant. And many times, our competition in this market is standard of care, but that's changing rapidly as physicians and payers become more educated about the effectiveness, both clinically and cost-wise of these products and the move of the big IDNs to value-based purchasing has really helped drive and expand the market. Clinical data is also helping to expand the market as more data is coming out, not just by us. We're certainly driving that, but others are as well. And the strong secular tailwinds that drive this market, the Advanced Wound Care market and our Surgical & Sports Medicine market, which is the aging demographics and the co-morbidities, such as diabetes and obesity, really are driving the market. So a large under-penetrated, the subsegments in technology that we're involved in are double-digit growers. On the Surgical & Sports Medicine side, that's about a $6 billion market worldwide, growing -- the broader market growing at about 8%. Again, the amniotic technology within this space in the orthobiologics space, where we compete, is growing north of 20%. So the areas that we're focused on are Bone Fusion and we have several offerings in that space. That's about a $2.7 billion market. There's over 670,000 spine fusion procedures done annually just in the U.S., and we have 2 offerings in the Spine Fusion procedure. We also are focused on the tendon and ligament injuries market, which is about $1 billion market. And perhaps the most exciting market on the surgical sports medicine side is the chronic inflammatory and degenerative condition market, such as knee osteoarthritis, tendonitis, plantar fasciitis. That's about a $2.4 billion market U.S., and that's primarily hyaluronic acid. And we have a very exciting offering, the product called ReNu. And why we're excited is AAOS recently recommended against the use of hyaluronic acid, and we've done a 200-patient study against one of the market leaders. And hyaluronic acid improved superiority in 6-month and 12-month time period, and that data has been published. And we're using that data to file a BLA and if successful with our BLA filing, we believe reimbursement will follow, and we will have a significant portion of that $2.4 billion market. Hopefully, that's helpful, Jon.

Yes. No, great. What do you see is your kind of core competitive advantages? And why do you believe the company is well positioned to take market share going forward? And maybe to just tack on to that a little bit more. What do you see as some of the potential challenges in the market going forward?

Sure. Well, our biggest competitive advantage is our portfolio. It is the most comprehensive portfolio in the space and is strategically put together not just from a technology perspective. We have 3 different technologies in our portfolio, but also how the products address wounds. There are 3 phases of wounds. And every wound goes through those 3 phases or 3 stages of wound healing. And our product portfolio addresses each one of those stages, in particular, PuraPly, our largest selling product and probably the fastest-growing product in wound care over the last 2 to 3 years, is a product that's an -- has antimicrobial capabilities and is a first-line product to be used when a patient comes in with a recalcitrant wound. So we're able to capture that patient early. And then our other products will take that product through the healing process, and we'll maintain that patient throughout the healing process. So not only is our portfolio broad, but it's strategic where it allows us to capture patients early and keep them throughout the process. We also have a rich pipeline, as I mentioned. Our pipeline products are near term with clear path to commercialization. We launched 2 of them in Q2, which supported the growth that we saw in Q2, our Affinity product, which is the only fresh amniotic product in the market, was relaunched in Q2 and has far exceeded our expectations and helped drive our Advanced Wound Care business, which actually grew in Q2, even though our PuraPly product, the largest product we have in Advanced Wound Care declined 4%. And so very strong product. Also PuraPly XT, which is a line extension of our PuraPly brand, was also launched and did extremely well and expect -- we expect that those products to be growers in the next several years for us. In fact, Affinity, we think, can be the largest product that we have, even larger than PuraPly. So broad portfolio, new products being launched, doing extremely well. And our commercial infrastructure. We have, I think, the best trained sales force. We have great relationships and those relationships showed up during COVID. When only 10% of the outpatient facilities were allowing access, we were in virtual contact with 97% of our customers and were selling into most of those centers even without physical access. So relationships, the size and strength of our commercial team and our portfolio and pipeline is why we believe we'll continue to take market share and continue to grow. From a risk perspective, the thing you always worry about is reimbursement. So one of the reasons we've moved into the office and really put a major emphasis on the office-based setting is it's a different reimbursement model than the outpatient model. So it not only diversifies the revenue risk, it diversifies the reimbursement risk, and it's also a very, very large market. So in this space, it's reimbursement that you typically will focus on and want to make sure that your products are well positioned and well reimbursed.

Great. Talking about reimbursement, it would probably be helpful for the listeners on the call here to understand what the changes are expected for PuraPly later this year are. Could you briefly describe what impact on revenue you expect the change to have? And what actions the team has taken to minimize this impact?

Sure. So PuraPly enjoys what's called pass-through status, which is given by CMS to products that are innovative. It's usually a 2- to 3-year period where some of the products will actually be reimbursed at a favorable rate. So the way reimbursement works today in the outpatient setting -- and it only affects hospital outpatient reimbursement. The office is a different reimbursement model. The inpatient DRG is a different reimbursement model. The VA is different. So it's only the outpatient setting. And it only affects the products that are priced over the bundle reimbursement that's offered in the outpatient setting. So it's a small subsegment of the product that actually gets affected by pass-through. But it does have an impact. Those products are today priced above the bundle and are reimbursed above the bundle, they will not be reimbursed above the bundle. So those products will have to be priced under the bundle. So you will have some ASP loss related to those products. However, the offsets that we've been working on, as I mentioned, first of all, is the office. So we now have a unique PuraPly offering in the office, unique sizes that address the wounds that are actually seen in the office. Reimbursement is strong for the product in the office. We have line extensions, the PuraPly XT that I mentioned, which is doing extremely well. We'll also have different sizes that will fit under the bundle price that will be scalable to handle the larger wounds, that the bigger pieces that were priced above the bundle addressed, so we won't lose the wounds. So we have significant offsets for the ASP loss. And the brand itself is just -- it's a strong brand. It's allowed us to get access to additional physician specialties that we've never had access to before, such as plastic surgeons. We do a lot of Mohs surgery. That's an area and a channel that we've never had access to. We also have access to trauma surgeons now as well as orthopedic surgeons. So the additional physician specialties and the sales channel and adjacencies that PuraPly has allowed us to get access to is going to drive double-digit unit growth of the product over the next 2 to 3 years as we see it. So PuraPly itself will do pretty well with the offsets that I mentioned in the office and XT. And then our other product portfolio, including Affinity and the rest of our portfolio, will absorb any ASP decline in Q4.

How would you characterize the long-term growth profile of the current portfolio across amnion, PuraPly and what you characterize as PMAs?

Yes. So we've guided that we see the company being a 10%-plus grower for the medium and long term. We expect that our margins will be in the high 70s to 80%, and we have a pathway to get there. A big portion of that will be product mix, but also within our existing footprint, we have the ability to efficiently consolidate some of our facilities. So that's within our control. And we see 7% R&D and SG&A being in the mid-50s, which leads to a 20% adjusted EBITDA company. So a 10%-plus grower and a 20% EBITDA -- adjusted EBITDA margin company in the longer term, 2022 and beyond.

Why don't we spend a little bit of time talking about your commercial strategy? Are you still expecting to have around 310 reps by the end of the year and agencies of around 170 to 180, as I think you outlined in your Q2 earnings?

Yes, yes. We're on track to hit both of those numbers. We, I think, today, have about 285. Actually, we probably have more than that as we sit here today, probably closer to 290. So we will exceed most likely the 305 that we had discussed.