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

Right. Well, listen, I apologize for the late start. So we're 5 minutes in, but hopefully we'll be able to get through some of the things we'd like to talk about. Gary and Dave, thanks so much for joining us. My name is Matt Miksic. I cover Medical Devices at Crédit Suisse. We're very pleased to have the team from Organogenesis with us today, Gary Gillheeney and Dave Francisco, thanks again.

Thank you, Matt. We're happy to be here.

So we've been starting many of the sessions this week with questions around the environment and staffing and COVID surge and so on. But I thought given that the amount of attention that has been given to Affinity over the past 4 to 6 weeks and some of the questions around the Medicare price list, I thought it might be helpful just to start by walking through some of the sort of basic questions and background on that topic, if that's okay?

Sure. Sure. So I think...

Go ahead -- I was going to start with maybe just the baseline question around the rationale behind seeking a published rate on the Medicare price list versus, say, where the -- how the product was reimbursed, say, a year or 2 ago?

Sure. So when a product is ready -- in our opinion, when a product is ready to be launched nationally, having a published ASP and being on the Medicare pricing list is an advantage. And that advantage is that you have access to these areas of the country instead of being restricted perhaps to lower reimbursement, which in some cases, may be positive, in other cases, not so positive. So having that access and being able to launch it nationally gives you a broader base to grow the product, gives you access to more clinicians, small physician, specialties around the country. We think that's the healthy strong way to grow the product. That's critical in our opinion to a successful launch. Also, it's important it's transparency and consistency in the rate. So when you have local reimbursement, those rates can reimburse differently. There's different levels of transparency into what those rates are. And at times, those rates could even change without notice. So there's a lack of confidence in some customers even in areas where reimbursement may be better that they're not confident and comfortable without having a consistent transparent rate. And we think long term, it's better to have a published rate and grow the business.

That makes a lot of sense. Yes, for starting off on that just basic, I guess, first rung of the ladder here. And then a natural question that might come to mind is why not start there? And why not -- why work local first and then national? Can you maybe talk a little bit about that as the evolution of the product?

Sure. So having a published rate, the expectation in the market is that the product is available to everybody. And when you have a situation when you're launching a product, we feel it's important, one, that you have good clinical experience with the product, testing the product in the market. You want to have your messaging right. You want to be sure, you have the share of voice prepared and ready to promote the product. You want to get your pricing right. So there's a lot of things, and when you're in launch mode, and in our case, certainly, you need to be able to factor it. And in the case of Affinity, I think we've been pretty clear about our challenges and to getting to where we are now, which is a solid supply of the product, but we were in a staged approach to building up manufacturing. So all of those things, in our opinion, have to be in place to have a successful launch before you seek a published ASP and then the processes you apply for it, CMS deterrents whether or not you're going to get it. Sometimes that's based on volume or whatever the rationale may be. But our feeling is you don't want to have a published ASP and have the expectation that a product is available and then have to tell a customer that it's not available. It's not rational, that's not a good way to launch, in our opinion.

And this isn't obviously titanium and plastic, it's a biologic that -- as you've talked about, we don't have to go into, but you've talked about a number of times in your calls over the last couple of years, the efforts that you're going into to expand supply and expand capacity to deliver the product. So I think that's clear. Just one follow-up on when you think about this, and I'm sure you had thought as you came around the bend at the end of 2020 and into '21, and we're preparing to file with the CMS for a rate the sort of kind of think about the impact of the transition of a business from local to international. Is that a net neutral? Or is it a mix of sort of some areas, you're going to get better in some areas, you're get worse? Is it a net negative, but offset by volume? How should we think about if we were to say run rate business this time this year, assuming that it was on the list versus run rate business last year? What's the calculus there?

So we think initially, it's net neutral, but ultimately net positive because of the improved access and the national exposure of the product. It also, again, brings that transparency that even opens up more opportunities in the areas that had positive reimbursement. So we think initially, it's net neutral. But over time, it will be net positive and it's a bigger, better base to grow the business.

Okay. And net neutral without -- not to get to -- read on this, but then neutral without the benefit of like an increment in volume, just you take the portfolio and accounts and you run that through the new system versus the old system, it's about neutral. Is that what you're saying?

With full access yes, that is our opinion.

Okay, okay. Right. All right. And then maybe just last on this national versus local. It was something that you mentioned on the call was this idea of a pause as you transition from local to national and then in the current quarter. I think you were describing a pause from national back to local since the prices for now come off the list.

That's correct. So if you think about it, and there's a lot of -- there are a lot of factors in Q3, and there will be in Q4, as it relates to access associated with COVID as well as the pause. But if you just think about the business, think about Q1 for most medical device companies. You have that seasonality impact in Q1 where reimbursement rates are being reset, deductibles being reset, you typically see that pause in Q1. And what we've historically seen in situations like that, is about a 20% drop in the first month and then progressively getting better in the second and third month and back to the normalcy really in that second quarter. So that's how we look at it, and that's what we assume in our guidance that we would see that kind of a pause, and it would be similar to what we've seen, again, in the typical seasonality in Q1.

Okay. And then -- and I guess, also similar to what you saw sort of if this is the pause between national to local again, for the rest of the year. The pause that you talked about in Q3 was going to go in the other way. So you had a price entering Q3. If you could maybe talk a little bit about how that sequence compares? And maybe what was different about Q3 than what you're expecting in Q4?

So we did experience a pause in October, as expected. What we're seeing is the improvement in November, and we've seen a similar improvement in August and September. So we see them being very similar at this point.

Okay. All right. And then I guess the last bit of that is you talked about the typical seasonality heading into Q1. And I think that's something that -- cover med devices and med device manufacturers are accustomed to the sort of deductible loading in Q4 and then sort of a pause in Q1, which I think most books will attribute deductible. But you're describing something that has to do with something else. So I think maybe just a little more color on what that pause is. Is it clinicians waiting to understand the new coverage? Is it -- how does that work?

Sure. And in addition to deductibles, there are rate changes at the beginning of each year as well for many different products. So you still have that dynamic, but you're right, it is different than the deductible. And it is a pause in benefit verification, and we typically see a bit of a slowdown in response in benefit verification processing because everybody is doing it in Q1. So that timeline from our customer requesting a benefit verification and getting validation, the reimbursement is what they -- it takes a little bit longer. But it's really that same dynamic.

Okay. So before we get into sort of the timeline of the initial filing, which I know you went through a bit on the call, but just to maybe step through for clarity is, when your pause and verification and inclinations go back to sort of more regular use of a product. Often, I think in markets and products, investors have some experience of once you sort of lose that foothold, it takes an extra umph to sort of get back into those accounts and if them using account maybe pushes side a competitive product or something else that the clinician has been using in the meantime. How much effort are you dialing in for that kind of process? Or is it more of a pull than a push back in?

You're correct. It's definitely a push back in our situation where we've had limited access because of COVID. We don't have as much of that pushback in because we have an access, as many new accounts as we had, though we are growing accounts every month. So there is a little impact on share of voice. We will have to focus more intensely on getting those accounts back up and running and getting them back to the normal watering patterns. So it is another piece of the puzzle that we have to focus on. And share of voice is important. It's important in all launches, it's a consideration. There's only so many hours in a day. There's only so much time sales representatives had to detail the product. So if you're pushing one, you're not promoting another, and it has an impact. So we do expect to push certainly kind of more in Q1 when we expect to have a published rate and put a lot of share of voice into a Affinity.

Okay. But so far in Q4, the sort of improvements in November, I know we're only in mid-November here, but you sort of indicate that those efforts are -- you're meeting the challenge of pushing back into these accounts, effectively, it sounds like.

We are. Yes, November, the trend is positive, and we're getting back into the accounts that have been using and getting them to continue to use the product. So that is a good sign, and we actually have added accounts each month. We added new accounts in August and September, and we added additional accounts in November to date. So we're feeling pretty good about the way the products trended in.

And I think on the call you mentioned expectations about -- given the trajectory and the similar cause and recovery Q4 to Q3, I guess, how can you -- how would you describe sort of sequentially or year-over-year, what you'd expect from this slice of your growth business and Affinity, specifically? Is that up year-over-year? Is it up sequentially? How do you think about it?

We think it will be up sequentially and year-over-year a bit because we are seeing that positive trends. And the accounts that we added in August and September are paying dividends, obviously, in Q4 and the additional accounts we've been able to add in November. We think we'll see an increase, both sequentially and year-over-year.

Okay. Great. That's super helpful color. And then maybe just front-to-back timeline, you filed for the -- you went through a very helpful series of comments on the call, but maybe talk about the initial filing and then sort of the timing and nature of you granting the rate and then withdrawing the rate just in June and September.

Sure. So we initially filed in Q1 as planned and I published ASP in Q3. And again, filed for Q2 -- for Q4, and we received the rate. The rate that we received was not correct. We understood -- knew it wasn't correct, so with CMS. So we informed them it was incorrect and went through the process of refiling, just we're not able to get the filing into CMS' system and uploaded in a timely fashion. And as a result because it was incorrect, they pulled it off the list. And we moved back, which is what typically happens is a disruption in the ASP filings. You go back to local matter of reimbursement. Unfortunately, for us, every rate hovering and every rate is reimbursing in Affinity.

Okay. And so that -- just to be clear, it's a little bit confusing, but you sort of got a rate of a CMS rate on the price loss enter in Q3, right, which triggered this pause as you're describing kind of evaluation, verification benefits began to see traction from that in, I guess, August. And then because the rate was then put up indirectly and it subsequently pulled back, that sort of slowed things down in September. And now we've worked through a pause again in October as you switch back, back to local. Is that accurate?

That's completely accurate. Yes.

So -- all right. And then, I guess, confidence in the ability to secure a rate in January. That's great to hear that, that's what you believe is going to happen. Like I'm sure books were wondering what level of confidence, how can you be confident, especially given, I guess, 2 things. One is the surprise filing error in the third quarter. And then and then also just the fact that other folks have been surprised by CMS. No offense to anyone. But if there's been some surprises this year, some and not all of which have been sort of resolved and to remain either -- decreases in reimbursement for different procedures, nothing to do with Affinity, but just the environment makes people, I think, jittery. So what can you share in terms of confidence for that rate coming back?

So I mean, you're, it's not in our control for sure. But the fact that we did receive a rate for Q4 was just incorrect, and we refiled for Q1. Our advisers were setting up for reimbursement. We rely on our outside advisers and legal counsel, and everyone is very confident that there's no reason why we wouldn't get another published ASP. To your point, as you never know with CMS, but we're confident based on what we know. There's no reason why we wouldn't get one. We have already received one. We received one through Q4, as I said, was just incorrect. So we just feel confident that we still have the -- that's the advice that we're getting from our advisers.

Okay. So I don't want to make -- ask too sharp pointed of a question, but I'm sure as Chief Executive and Management Team, I'm sure you've asked how did this happen, filing error or clerical error, when it causes the kind of confusion that was caused in Q3, is obviously frustrating for a lot of folks involved. Where, I guess, did you -- what was the sort of the root cause analysis of how this happened? And maybe what actions were taken internally or with external advisers to make sure it doesn't happen again.

Sure. So we're certainly not going to discuss our conversations with CMS and are back and forth of how this happened. But to your point about preventing it from happening going forward, we've changed our internal processes, but we've also outsourced the entire -- affirm E&Y actually, that will now be analyzing and helping us submit our files. We've significantly increased the controls and it's actually got sourced into E&Y.

Great. That's helpful color. So maybe one question that we get often is how maybe the disruption or confusion around reimbursement or the transition from national to local drove either discounting patterns or pricing patterns for Affinity across geographies. So can you give some sense of how the range of pricing has changed, if at all? Or how much -- or if at all, you've had you any discounting to sort of to help make for over some of the confusion with your customers?

So we can't obviously talk about pricing for competitive reasons. But over the last year and since we launched the product, we really have not discounted the product. One of the things you want to solve for in addition to clinical experience and messaging and how the product fits into the practice is you want to get your pricing right for national. So we haven't done any discount in the product. When you move to a published ASP, it may be an adjustment in the price and on the ultimate rate that's provided, so you have to consider that as well. But we haven't done a lot of discount over the last year.

All right. That's helpful. And so in terms of a range then, I mean, one of the only prices that we have to work with is the published price from entering into the third quarter, which it was $550 to $600 per square centimeter. Is that sort of a good way to think about the those round number range of what the pricing has been over the past year to your customers?

We haven't disclosed what the Q1 ASP will be. Quite frankly, we know what we filed until CMS is posted, really can't describe it. But generally, that's in the range what we've seen.

Okay. Great. That's helpful. So another topic, and I mean, I'm going to stop for a second to say that, time permitting, it would be terrific to talk about some of the great things that are going on across the portfolio and the type of growth you've been putting up and plan to put out despite these problems. So not to focus 100% on these issues, but I do think that the front and center, as folks think about the investment opportunity. The other question we get often is the strength in PuraPly and how pricing reimbursement and the sort of strategy coming out of the pass-through have effective growth there. So maybe just specifically in Q3, given that it's a slightly different clinical indication, different patients, as you've talked about a different type of wound, maybe less persistent wound that where PuraPly is used, how can you maybe describe what drove that growth sequentially? Or where did you find the bandwidth and focus to drive that kind of sequential growth as Affinity was slowing?

Sure. So just in generally, I mean, the brand is very, very strong. We've built it over the last 7 years. And we've built it broadly through additional physician specialties utilizing the product, different sites of care. So unlike Affinity, we sell PuraPly in the OR. And most recently at SAWC, there was a presentation by a dermatologist regarding Mohs surgery and use of PuraPly in Mohs surgeries. So calling on dermatologists, plastic surgeons, again, in the OR as well as in wound care centers and in the office, it has broad use, clinically and sites of care. So it's a unique product, and it gives us many opportunities to sell the product. The other thing to consider, too, is the demand. I mean our market so underpenetrated that there is an enormous demand for all of these advanced modalities and PuraPly being one of them. So when we apply more focus and bring more awareness to the product and more clinicians, you're going to see an improvement in sales. And that's clearly what happened in Q3 with the renewal and new cell coming off of Perkin, that gave us more opportunity to focus on PuraPly. And quite frankly, with Affinity, not having access to as many accounts as we had hoped, we've turned our attention and focus more on bringing awareness of PuraPly to multiple sites of care. And you're right, it is a different type of patient. And it is a different -- even in the wound area, it's a different stage of healing product. PuraPly is really in -- for the inflammatory stage of a wound. If you don't get out of that inflammatory stage, you never move on to proliferation and remodeling and then closure. So it's a different focus, different sites of care opportunities, and that's really why the product group.

Got it. Okay. And that's -- so renewal and new cell, obviously, were products that you were selling through the surgical specialties team. This -- I mean, it makes sense that given that you're pulling those products on their bag that they had more bandwidth to focus on PuraPly those sites of care that you're describing. Just to drill down on that a little bit, PuraPly, remember, for some time, have been unsure still is the vast majority of it selling away from surgical specialties into advanced room care. How -- if we were to just sort of try to understand the context of this growth and what you're describing, how has that changed as a percentage of the total business at this point, say, versus where the percent of total PuraPly going into surgical specialties maybe 2 years ago versus today?

So I think wound care is still the majority of PuraPly because of its growth and it's size. As a percent of total revenue, surgery is definitely getting larger, and these other specialties care and specialty procedures are definitely becoming more of the growth of the product. And it's an area that we're excited about. Those additional channels, the surgical channel is one when we think Regenerative medicine technology will play very well in getting access into that channel is important and PuraPly is a product that we're now seeing in trauma, lycolide and dehiscence surgeries, complex wounds, all of those areas where a surgical site infection is a challenge or soft tissue wounds are challenged. PuraPly is becoming more and more utilized in those procedures, and we're excited about it.

Okay. So maybe just to look for a round number or a range, is it broken through sort of the 10% threshold for PuraPly sales outside of the outpatient wound care clinic? I guess that would include inpatient acute care, that would include other sites of care where it's a surgical wound, et cetera. Has it broken out beyond that 10% range yet?

It's relatively modest from that thing. Certainly, in the Advanced Wound Care, significant penetration in the office chain.

Yes. No, I meant like percent of PuraPly sales, in other words, away from the outpatient wound care clinic, which is kind of where you really -- where maybe 3 years ago, you were highly contemplated there with a small amount in surgical. So maybe you think about it that way, is it still vast majority through outpatient wound care, but 10% away? Is that fair or not quite yet?

So if you're looking at the outpatient center, this significantly advanced outside of the outpatient wound care center.

That's helpful. I appreciate it. And I know you don't love to provide the kind of product line color that I'm asking is, so I do appreciate the additional color that you can provide. So last topic -- a question on this topic, which I think was a question last year as we kind of transition through the pass-through payment expiration in the back half of '20. But it sort of come back up as another question that folks are trying to understand better. And I'm sure we're not going to ever understand exactly how the strategy works to manage through that, which you've been preparing for, for probably 2 or 3 years or maybe longer. But can you provide some color on how the various pieces of PuraPly team together in Q4 and in 2021 in such a way to deliver growth in a product that was suffering a hit to reimbursement? If you could talk a little bit about some of that, right, because sites of care and greater use of surgical procedures and so on. But if you could sort of paint a picture of how those pieces come together, would love to understand it.

Sure. So launching new products and new SKUs is a big part of it. Making sure that we were selling the product, to your point, in multiple sites of care in HOPD, outpatient, in the office, in surgery. The other thing is it's just much more brand awareness, the second time. So there was a lot of clinical experience. We had more data for the product, we had more sizes for the product. So it was just a broader brand and broader usage of the product, more clinical data, more confidence in the product and a lot of focus. We've put a lot of focus and effort in our market and sales to bring that product to market and pass-through and to promoting in those additional sites of care.

Okay, SKUs. So any significant changes in pricing? In other words, I think the fear heading into that -- heading into the pass-through reimbursement and exploration was that you have to meet that or match that with some cuts to the price, and it seemed like you were able to avoid certainly across the board price cuts. But were there any areas where you had to sort of meet customers halfway? Or take down your price because of the reimbursement, non-patient, for example?

Yes, sure. So the larger pieces that were priced over the bundle certainly were impacted. But we had less exposure from a revenue perspective to those products by design coming out of pass-throughs. We had more products that were under that price. We had more products being sold outside of the bundle. So the impact of the revenue decline for those larger pieces just wasn't as impactful as it was at first.

Got it, got it. Super helpful. All right, well, with the couple of minutes that we have left, maybe just to zoom out for a second and talk about even with the sort of reduction in the combination of reduced amniotic growth expectations because of Affinity, which we discussed, and increased PuraPly growth expectations because of the ability to sort of drive more growth there with the capacity that you have and so on. Maybe talk a little bit about the significant growth drivers in Q4. And how do you expect those to kind of either sustain or be enhanced here as we head into 2022?

We haven't guided to '22, but we certainly see our amniotic franchise continuing to grow. As we mentioned, it will grow in Q4. And we expect our amnions to be a growth driver in our pipeline, we have additional products that we expect to be launching next year. One being in amnion, the other one, perhaps 2 products, which we -- are line extensions for PuraPly, will help both of those product lines, those brands to grow, not just next year, but the year after as well.

Okay. And the physician office channel growth potential was a big part of the story over the past year. Maybe where you stand in terms of -- and I know you don't love giving specifics on accounts. It's very competitive, you don't want to give anyone a road map to what you're doing, but -- in terms of your competitors. But where do you stand in terms of ability to sort of penetrate CPN's accounts, add to those accounts, reach new accounts for that target market physician offices.

Sure. So as we've discussed before, the physician office market is large. It's about 12,000 offices. We see about 6,000 of those being high potential, we're no way near penetrated into that -- those 6,000 accounts. So we see a real opportunity to continue to grow and add accounts there and continue to sell all of our products through those. So we're early innings, as it relates to penetrating those 6,000 of high potential.

And then lastly, we have got a minute here, but margins. So your guidance for the year, I think you've been surprising since the back half of last year on just the strength of EBITDA margins and hitting profitability targets faster than expected, but we're sort of sticking to this positive guidance for this year? I know you haven't guided for next year, but can we expect you start zeroing in on a range for us in '22 or '23 and talk more about what you're willing to commit to on that margin line?

Yes, I think we certainly will, Matt. I think we've talked about the long-term goals being just north of 20% adjusted EBITDA. When you look back over the last several quarters, we hit back several times. And I think the issue there is that, it's that big step-up in revenue that you mentioned in the back half where the revenue really outpaced our ability to grow the infrastructure of the business. We made a lot of progress on the commercial side, but there's more -- it's more ads from that standpoint and we continue to build out the infrastructure to the growth going forward. But yes, we think we'll put some more parameters around that, as we move into '22.

Excellent. All right. Well, with that we're at time. And really thank you for being able to walk through some of that detail. I think it was helpful, helpful to me certainly and helpful to other folks who joined us. And good luck with the rest of your meetings. Very much appreciate you joining us again this year, Gary and Dave. Look forward to keeping in touch.

Thanks, Matt. Appreciate the opportunity.

Thanks, Matt.