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

Thank you, everyone, for joining today for the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analysts here. From Organogenesis, I'm delighted to have President and CEO Gary Gillheeney and CFO David Francisco here with us today. Just before we get started, a disclaimer. For important disclosures, please see the morganstanley.com research disclosures website. If you have any questions, please reach out to your Morgan Stanley sales rep. And if you are tuning into the webcast, feel free to send in any questions, and we'll try to read those into the conversation as well. And with that, Gary and David, thank you so much for your time here today. Really appreciate your participation in the conference again this year. So, looking forward to the discussion.

Well, thank you. We appreciate the opportunity, Drew.

Great. And maybe just to start, Gary, can you give us a brief overview -- a high-level overview of the business, how your product and your business model, which it seems like it's evolved a bit over the past 2 to 3 years, are really differentiated in the marketplace?

Sure. I'd be happy to. So, Organogenesis actually has been around for a while, really, kind of reinvented itself over the last 3 to 4 years by truly expanding on our technology platforms and producing additional products, new products, opening additional adjacencies and sales channels that can benefit our regenerative medicine technology. So today, we participate in 2 very large end markets. One is advanced wound care, which we see is about a $9 billion market, and surgical sports medicine, which is about a $6 billion market. We attack those markets with what we believe is the most differentiated portfolio in the markets we serve with 7 products. We have a rich pipeline, which is consistent to our history of research and development here at Organogenesis. So we have 7 products in that pipeline that we expect to launch over the next several years. Being around as long as we have, we have over 200 studies studying our products. We have 14 ongoing clinical studies supporting our existing brands and new products coming out. And we're a fairly large company in -- particularly in wound care. So our infrastructure is large. We have over 500,000 square feet of research and development, product development, manufacturing and logistics space, and the company has been growing fairly nicely over the last several years. So, the benefit of opening additional channels with our additional product portfolio has produced nice returns and revenue results for the company.

Got it. Great. Thanks for the opening remarks. And I hope in 12 months, we won't have to talk about COVID, but just to start there and get it out of the way, just I think in early August, you mentioned you were seeing maybe some regional impacts of the Delta variant, particularly in the South. I mean to the best that you can comment, I mean, how has that trended maybe into September? And just -- are you on the procedure side are you seeing any impact on the input cost or any other supply chain disruptions?

So fortunately, we haven't seen any supply chain interruptions. It's something we monitor very closely and we manage very closely. On the COVID impact, we're certainly seeing an impact on our Surgical & Sports Medicine business units with elective surgeries. We've definitely seen an impact in August and September, a similar impact, not as great in Advanced Wound Care in August. On the Advanced Wound Care side, we're starting to see a turnaround in the last week or so and we expect that turnaround to continue. And hopefully, things will be more back to normal as we get into October. With the exception of Florida and Texas, those regions have been the hardest hit for us and continue to be behind in the recovery, particularly on the Advanced Wound Care side. On the Surgical side, we expect the hit to continue through September and start to see improvements as we get into October and the end of October. But we are seeing signs that both are starting to move in the right direction. We just think the Surgical side will take a little bit longer in the recovery.

Got it. And several companies and these might have been more elective procedure-based companies kind of highlighted that there was maybe surge indication or doctor vacation impacts in the quarter. I mean does that thesis play out in your business or in Wound Care specifically or Sports Medicine?

It certainly has. I mean there's always a seasonality effect when you get into this part of the year. But we did notice that that seasonality effect did seem to prolong a little bit. So, perhaps the vacations were a little longer and the shutdown of the facilities might have lasted a little longer in the summertime. But that's changing as we've seen in the first few weeks of September. We're seeing that seasonality swing back.

Got it. Okay. Let's jump into kind of the wound care market and the business specifically, but you acquired CPN Biosciences. Now, you've renamed it Organogenesis Physician Solutions. So that business, that acquisition expanded your office reach. Can you give us some more color on the acquisition? I'll assume maybe you won't give more specific numbers, but can you maybe frame the progress that you're seeing in terms of adding new customer accounts in the office channel and driving utilization higher?

Sure. So CPN or Organogenesis Physician Solutions is definitely a strategic acquisition for us. It's given us more strength in that channel. We acquired approximately 1,000 customers with that acquisition. We've penetrated about 200 of those customers right now. We've been fortunate that -- we've been able to sell our regenerative medicines, skin substitute products to those accounts, many of them were new to our products and our technology. So we've had really good success in penetrating those accounts and bringing our skin substitutes to those accounts in addition to the CPM products that they were already buying. So it's really helped solidify us in that space. Now if you think about that market, there's over 12,000 offices. We think about 6,000 of them are high-performing potential offices. So, the opportunity to continue to grow with their technology and with our products in that channel we think is significant for us.

And just in terms of the 6,000, I mean, it's a long runway that you have ahead of you. And just in terms of penetrating those accounts, I mean, should we be thinking that this opportunity is more gradual and supportive of growth? Or do you reach kind of a certain critical mass and inflection point and just really kind of capturing a lot of those accounts at once?

No, it would be more of a gradual growth for us. As you expand in the office, you have to expand your commercial infrastructure to support those offices. So, we see it as a continued growth opportunity for the company over time.

And can you give maybe a sense of where revenue mix stands between offices and the ASC settings? I mean how has that trended over time? And kind of where do you see that moving? What's the right balance here?

So we don't guide based on percent of revenue. But what we have said is, historically, in 2019, we were below -- 15% of our Wound Care business was in the office, and we made a concerted effort, as you know, to move into that channel. And our goal was to get to about 42% by 2022. As we last guided, we're now north of 40% already, 40% and it's grown. So, we think that trend will continue. What's the perfect balance? We think it depends on what the product portfolio will be over time and what the environment is like over time. But we think a higher weight in the office versus outpatient setting is the right risk profile and the right opportunity to grow new products and launch new products.

And so just to use 40% as a baseline here since that's the last time that you guided, but it's rare that anything ever gets to 100%. So, I guess going from 40% to 80%, kind of what [ does ] that commercial pathway look like and kind of what's the investments that you may have to make to really drive that opportunity?

Sure. So, I'm not sure 80% is where we'll get to. But as we continue to grow that business, it really is the commercial infrastructure to support the office and the expansion of the capacity of the CPN system that we acquired, it's a physician practice management solution. We need to continue to increase the capacity of that system as well as the value proposition and the service offerings that will go through the system. So those are the investments that we would need to make -- and continued training of clinicians. One of the benefits of moving into the office is we really have been able to expand the market. There's always been a lot of wounds treated in the office, but it's been basic wound care. We now have the migration of wounds out of the outpatient setting into the office as well as the wounds that traditionally have been there. And we're now getting clinicians to adopt our advanced modalities and starting to use skin substitutes where they haven't in the past. That's really the market expansion that I think we've all been looking for in this space since the market has been maybe 5% to 8% penetrated. And the real competitor has been standard of care and that standard of care has been happening in the office. So expanding the office is also expanding the market and that requires commercial infrastructure to continue to do that.

And just, you seem to be a little bit ahead of maybe where your competitors are in terms of the shift in your business model and focus, but are you seeing competitor products or competitors in general, kind of coming behind you to essentially just follow on your coattails?

We are certainly seeing more activity by our competitors in the office for sure. It's a little difficult to compete with us with the breadth of our portfolio and the infrastructure that we have that supports the office-based channel. It's a different model. It's a different channel. It requires different services. It requires a broader portfolio and it requires a large commercial team, which I think we probably have the largest team in the market right now to cover those offices with the level of service and support they need, particularly, if you're expanding the market and they're new users to advanced technologies.

Got it. And is there anything that maybe we should highlight there in Wound Care that I'm not thinking of before we move on to other topics?

No, I think we've covered it pretty well, Drew.

Okay. And maybe let's shift over to PuraPly for a moment. I mean it's clearly having a strong year, 3 consecutive quarters of double-digit growth. The current guide, I think, is 22% to 27%, which is meaningfully ahead of the initial guide. I mean, it's really impressive that even coming off the pass-through payment, growth has been so strong. So maybe just help me help investors just better appreciate why. I mean it's almost kind of counterintuitive to see the loss of a pass-through payment, you're increasing your revenue guidance there.

Well, I think the product is much better positioned this time coming off the pass-through. So, we have multiple product sizes. We have specific offerings for the office. We have different offerings for the outpatient setting. We've been able to introduce the product because of its utility to additional physician specialties that we traditionally have never really serviced before. For instance, dermatologists and plastic surgeons. We get a lot of Mohs surgery business -- post-Mohs surgery applications of PuraPly, that's something that we haven't had before. We're getting PuraPly in the OR in utilization. So, that's an area and procedures that we haven't really had before. So, a combination of the product works extremely well. The brand is strong. We've launched 5 new SKUs of PuraPly. We have site-specific product offerings. When you put it all together and the product works, it's really what's driven the growth of the product.

Got it. And when you have to look maybe down to the line extensions, I mean, just maybe outline the importance of those. Is there any more room for extensions? You talked about having specific products for an account, but just what's in the future bag, new generation products that we should better appreciate?

Sure. So, we expect to have additional product offerings of the PuraPly brand for sure. Our focus is we will have some in Wound Care, but the surgical Sports Medicine side is where we're focused. So we'll be developing and launching products that will be more specific to those adjacencies instead of Wound Care. And we think that the opportunity in those channels are fairly significant for the product. It's new in those channels. So the new offerings will be more specific to those channels.

And kind of what's the development pathway there, commercial launch? I mean are we talking quarters? Are we talking years to see some of those products hit the market?

Sure. Some will be quarters and some will be within a year.

I mean is there any like specific home run product that you would call out? Or is it more just about, again, just having the broadest bag for clinicians?

Well, every product that we launch, we like to be sure it's differentiated in some way. So, anything that we do launch in the surgical setting will be more specific and will have some differentiation in the space. But we don't have any 1 product that we're focused on that we think will be a significant difference from the other products that we've launched on the PuraPly line.

Got it. And just as you look at kind of your current portfolio today, would you say that growth has been coming more from expanding into new facilities or really kind of penetrating existing accounts? Like can you just maybe rank those 2 for us?

Sure. So we've been fortunate that the productivity of our reps has increased steadily over the last 3 years and particularly of our seasoned reps. So we're seeing that deeper penetration in the existing accounts, and we certainly incent our representatives to get deeper in those accounts, get a greater share of voice, create more goodwill in those accounts as well as increasing productivity. So that's clearly an area of growth for us, which is our portfolio on our new product launches. And then, the expansion of the market, as I mentioned earlier, bringing on new accounts and we're constantly adding new accounts. Our growth in accounts and in revenue, both in HOPD and in the office exceed the market's growth rate. So, we're continually outpacing the market. So we're expanding the market. We're taking share, and we think that that market expansion is going to be a big part of our growth as well.

Got it. And on the market expansion component, have you sized what that market opportunity could be or -- from a dollar amount or even from a volume perspective or procedure perspective?

I think the best guide I could give is the 6,000 offices that we think are high potential. That's a significant market. Our penetration is fairly insignificant into that 6,000 right now. But no, we haven't really put a number on what we think that potential channel could be. But it's large.

Got it. Okay. And with PuraPly again for a moment, the current guide is 22% to 27%. I mean that's a significant growth rate. But just how do you think about the long-term growth profile of PuraPly and where do you see that kind of at a normalized rate?

So we haven't guided beyond '21, but I think what we've said in the past is we see PuraPly being a low-double-digit grower over time. As we expand into additional channels, we continue to see the opportunity to grow the product. So we think it potentially will be a low double-digit grower going forward.

Okay. Maybe let's move over to some of the pipeline products. I know you highlighted 7, kind of in your opening remarks. Not sure if we'll get to every one of those. But just maybe on TransCyte for a moment. I think on the second quarter call, you mentioned that you're expecting a commercial launch in 2022, a fuller launch at the end of 2023. I'd just like to better understand kind of the timing of the cycle there from going from a limited launch to a full launch over that time period? I mean, is there something commercially that we should be better appreciating for you for that time period? Or is there something on the operational side that's maybe making that being a more protracted fuller launch?

It's operationally driven. So, we are closing our facility in La Jolla, California, which makes TransCyte and it also makes Dermagraft. We'll be closing that facility at the end of the year and moving that manufacturing to Canton, our campus here. But to do that, we need to finish out the building that we have here on Dan Road and that building won't be completed until 2023. So, we can't make TransCyte at scale without that facility. So, the soft launch is we can make a small amount of product to reintroduce the product to the market, get clinical experience, but really the commercial launch won't be until we can make it at scale here in Canton, Massachusetts.

Got it. And just maybe a silly question, but why is burn really the right market for Organogenesis to really enter with this product?

Sure. Well, TransCyte is already PMA approved, already has commercial insurance. It's a regenerative medicine technology. And the rest of our portfolio, we have assets that we'll also sell into that space. So, PuraPly is available to be sold for second degree burns as is NuShield. And we also have a biosynthetic wound matrix that we'll be launching with TransCyte, which we have very high hopes for as well. So we're going to go into that space with regenerative technologies in that adjacency and have a very strong bag. So we think it makes perfect sense for us. The fact that it's a very efficient market. There's about a 126 burn centers that treat about 60% of all burn patients. So you can cover that market commercially with a small sales force. And we have a broad portfolio already with TransCyte, the wound matrix as well as PuraPly and NuShield that we're going to attack that market with. And we're looking for opportunities to expand our bag, not only in the surgical side -- in the burn side as well.

Got it. I'm going to assume the answer is no to this one, but can you benchmark maybe your revenue expectations for TransCyte maybe against some of your existing products in your portfolio? Just trying to get a sense of like how big TransCyte could be maybe against Affinity or PuraPly?

We think the addressable market is much smaller in burn than it would be for Affinity or PuraPly. So we see the market is $200 million to $300 million. I know others see it to be much larger, but that's what we see as the addressable market. And we think with our portfolio, including TransCyte, that we would have a significant portion of that. And we think it would grow similar and be of similar size as our other PMA products like an Apligraf.

Maybe moving over to the amnions for a moment, but just touching on the Affinity capacity, capacity seems to be the word here. So you've mentioned increasing capacity to 2.5x in 2021 versus the prior year. But can you give us a sense of where you stand currently in capacity expansion? And as we're thinking beyond 2021, I mean, is there more to come on the capacity side?

Sure. So, our goal is to get to 2.5x, as you mentioned, in total capacity in '21 versus '20. We had a large jump in capacity in Q2, which was an important step in getting to that 2.5x. We will not have any increase in Q3, but we have 1 more in Q4 that we're expecting. And right now, it's trending very well. And so we believe we will get that additional capacity increase in Q4, and that will get us to the 2.5x. From a run rate perspective, it would be more than 2.5x. So, we will see a smaller jump in 2022 in capacity as it relates to our existing facilities. However, we are going to add in a second third-party manufacturer in Q4 of this year that will make Affinity. And next year, we will be building out capacity here in Massachusetts that will supplement our Affinity manufacturing as well. So we'll have 3 sites that will support the affinity product. So we feel pretty comfortable with our capacity going into next year.

Got it. And your manufacturing though, would that represent kind of the largest component of capacity?

Yes.

Let's maybe touch on ReNu and NuCel for a moment. Just how are you thinking about the overall OA market? I mean ReNu seems like it's differentiated against the hyaluronic acid backdrop. Just theoretically, how much share could you potentially take in the HA market? Maybe just -- and talk to the potential for ReNu even beyond knee OA?

Sure. So we see ReNu competing in basically the viscosupplement market or hyaluronic acid, which is about a $2 billion market. Our 200-patient study that we completed, which was a 3-arm study against the -- 1 of the market leaders in hyaluronic acid and saline and showed superiority to both over 6 and 12 months. So we feel very confident in the product's efficacy. So if approved, we think there's a strong possibility of getting reimbursement. We would be first to market, at least in the amniotic space, in this pain area. And that we would have a meaningful share of that $2 billion market. So we feel really strongly that if approved, it would be a very formidable product in that space.

Got it. Wanted to maybe give some questions to Dave for a moment. I feel like I've monopolized a lot of your time during the session. But just maybe turning to the P&L, you turned the corner on profitability last year during the pandemic, the height of the pandemic, which was clearly impressive. But as you're looking ahead between balancing growth and profitability, just kind of curious, I mean, what's your view there between balancing growth and profitability? And maybe ultimately, where do you see profitability going over time? I think you're guiding to 20% plus EBITDA this year. But just any direction, I think, would be helpful to hear.

Yes, sure. It was really exciting to hit that milestone last year, obviously. And really, I think it was related to a very large uptick in the revenue base between H1 '20 and H2 '20 and we saw sequential growth there. It was quite significant. So we saw a lot of flow-through to gross margin, and there was relatively minimal impact to operating expenses. So we did see some pretty strong flow-through. And I think even looking back in the last 4 quarters, the first half was also quite profitable. So, we've really kind of grown in revenue a little bit ahead of our ability to build up the infrastructure to support that growth. So, I think as you talk about balancing profitability growth, we're really biased towards growth, absolutely. But the long-term trajectory has not changed. We're still looking to be in the -- just north of 20% adjusted EBITDA margins on a long-term basis.

Has the pandemic maybe stalled or delayed some potential investments to support that long-term growth? I mean, are you running at, I'll say, normalized rates in air quotes?

Yes. I think the -- what we've made some great progress on is the commercial infrastructure. We talked a lot about that making those investments. I think it's the other investments in back office and the other things that are needed to support the growth in a larger company, as we are now, is really putting a little bit of strain on it to some extent. But we're making some progress there, and we'll continue to invest, and we see that continuing into '22.

This might be a question for both of you, but you made the CPN acquisition. Just broadly kind of what are you thinking about in terms of M&A? And it sounds like you're doing a fantastic job with organic growth. I mean do you feel like you need to layer in any additional M&A or specific products from the outside to achieve growth targets?

Yes, we certainly are always looking to increase the strength of our portfolio, but we are particularly focused on the extremity area looking for products that will help in that adjacency and strengthen our offering. So that is something that we continually look at. And there are products out there that we're looking at right now. Nothing that we're prepared to talk about. But definitely looking for those types of channel opportunities that will get us in channels that are regenerative technologies, we think will play extremely well. Our commercial infrastructure is strong. We feel pretty confident that getting in the channel with the appropriate portfolio that we'll be able to succeed in those additional adjacencies.

Got it. I know we only have a couple of minutes left, but I wanted to make sure that I turn the floor over to you if you have any closing remarks or comments, anything that we missed that we should be highlighting here?

No, I think for us, we're excited about what we've accomplished with our portfolio. We continue to build our commercial infrastructure. We think our regenerative technologies have opportunities in other channels, as I've mentioned a number of times today. And we'll continually aggressively go into those channels, and we think we'll create long-term growth for the company as a result. So, we're excited about what we're doing, but we're equally excited about the future.

Great. And thanks so much for the time, Gary and David. Really appreciate you being able to attend this session and participate.

Our pleasure, Drew. Thank you.