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

Welcome to another session. I'm Drew Ranieri one of the medical device analyst here at Morgan Stanley. And I'm delighted to have members of the Organogenesis management team with us here today. Gary the CEO and Dave, the CFO. Maybe just before we kind of jump in I have to read the quick disclaimer but for important disclosures please see the Morgan Stanley Research disclosure website at morganstanley.com/researchdisclosures. And if you do have any other questions, please reach out to your Morgan Stanley sales rep. With that let's kind of kick it off. And Gary, maybe just spend a couple of minutes to kind of give some introductory comments and really set the stage for where the company plays its markets and really the growth opportunities that you see for the company?

Appreciate the opportunity. So Organogenesis, we're a med tech company. Primarily our technology is in the regenerative medicine space. Our heritage is living cellular products. The company was formed in 1985 actually out of MIT, Dr. Eugene Bell's lab and maintained a rich history of research, development and living technology. The markets we play in today are very large and growing which is the advanced wound care market and the surgical sports medicine market. Both markets driven by strong secular tailwinds, aging population, obesity, diabetes, vascular disease, continuing to drive both surgical sports medicine and the advanced wound care market. So we're excited to be here. We're excited about our pipeline. We have a large footprint in advanced wound care. We have a smaller footprint in surgical sports medicine but it's a focus of ours. And our pipeline has some exciting products primarily in the pain and in the surgical and burn space. So a lot of growth opportunities both in the broader markets. The submarkets that we sell in are growing double digits in our pipeline. It gives us a lot of long-term growth opportunities.

Thanks for your review and definitely a lot of opportunity to ask some questions around that. Maybe before we kind of dig in there I have to ask about the macro environment right now. Just Organogenesis seems insulated to some degree in some respects versus maybe some traditional med tech companies. But we've heard kind of throughout the conference that utilization, procedure volumes have kind of improved from June, July lows. August has improved and even into September. But love to hear if you could provide any details on what you're seeing on your end?

We're seeing improvement as well as we've guided during our Q2 call. The COVID headwinds have subsided a bit for us. So we're seeing better access, our own sales force. We had a number of folks in the first half of the year out of the field because of COVID-related issues. But that trend has improved. There's still some issues in the office related to staffing. Census was down about 5% to 7% in the office. And we've seen delayed in procedures which is discouraging for the patients. And unfortunately, as a result of those delayed procedures amputation rates are up about 50%. So that's extremely discouraging but it's created enormous awareness about the need to treat these patients and treat them quickly and to treat them with advanced modalities like ours. So as a result, this year, we've seen a true expansion of the market particularly in the office setting. If you look at that setting the number of physicians utilizing the products in regenerative technologies has increased over 20% and the number of patients getting advanced technologies and modalities like ours and others is up over 30%. So the awareness of the disease state and the challenges and the benefits of regenerative technologies are becoming more and more aware in the market. And as clinicians become aware of them they're starting to use them and we're seeing that expansion in the market.

And kind of with the market with the channel breakdown, I mean you might have talked about this previously. But can you give us any updated sense on maybe what the channel penetration is and maybe how that's evolved for the company over the past couple of years? And I'm interested in really knowing like how much that actually matters for the company's growth?

It's important to us to increase in the adjacencies and additional sales channels where our technologies will work. So we've expanded in the office. That has been a focus of ours even pre-pandemic. We could see the trends in medical claims where patients are moving out of the hospital into the outpatient settings and from the outpatient settings into the office and eventually into the home. So we have aggressively attacked that channel and has expanded it and we're now the market leader in the office as we are in the outpatient setting. The surgical area is an area where a significant number of skin substitutes and technologies like ours are actually sold. About 30% of all skin substitutes sold are in the OR. So we see a tremendous opportunity and are spending a lot of time and effort to build our competency in that channel. Physician specialty is also an area of expansion where traditionally mostly podiatrist was using a lot of the skin substitute products. But now we're seeing physician specialties like dermatologists for most surgery, plastic surgeons, even trauma surgeons with our PuraPly product and its antimicrobial capabilities are being used in the acute surgical wound setting and then the trauma setting. So all of those areas are areas that we're seeing growth and that we see as part of the future long-term growth potential for the company.

I'll ask the quantification question on those other sites of care. But can you give us any details on maybe how those trends are going for dermatology in the acute care setting for the company? How significant of the growth factor has that been maybe over 2022?

We have for competitive reasons, we don't really talk about how aggressive we are in certain channels. But I can tell you dermatology has been a really nice growth driver and a real opportunity for us particularly our PuraPly brand. And if you think about the OR, you think about acute surgical wounds and you think about surgical site infections. The surgical site infections are about a $10 billion problem in this country. And you have about 50 million surgeries. Probably 30% of those are closed by secondary intentions. They're left open. And so you have a lot of issues with infection 1% to 3% depending upon the study of an acute wound or surgical wound is going to have an infection. And our PuraPly product which is purified collagen with a broad spectrum antimicrobial. There's no other skin substitute like that. It's patent-protected. It is a real opportunity in that market.

And I wanted to come back to something that you mentioned about the transition from settings into the physician offices and into the home. So I'd have to imagine that last part is probably very much in its early days. But can you kind of give us a little bit more detail on how you're thinking about that as a strategic priority? And maybe what's step A to Z to kind of get you there?

So clearly there's a trend in wounds being treated in the home and in the midst of the pandemic. For the first time that I'm aware of that CMS allowed skin substitutes to be applied in the home and reimbursed. So that was a huge step forward. And our acquisition of CPN Medical last year which is a physician practice management solution to help within the physician's office to help them manage their DME products as well as their patient flow was a decision to get closer to the doctor, to get closer to the patient. And as that patient and care moves into the home that we would have that connectivity for that patient in the home.

Maybe just to go on to a different topic. But I have to ask about kind of the proposed CMS rule that came out in July. It seems like this is a kind of an elephant in the room. And just understandably the rule is complicated. But maybe just for our benefit, talk about what CMS is proposing? How that might affect the company? And really kind of what's your messaging there?

So it is a proposal. It's not a final rule as you mentioned. There are some significant pieces that are missing to really be able to assess what the impact would be. But what we do know is, one, there's no impact in 2023. And they want to bundle in 2025, create a bundle in the office that we assume would be something similar to the outpatient bundle maybe not directly in design but in concept. '24 and beyond '25 is again unclear in the ruling. But the way we see it is that if the proposal is reasonable and we expect it will be reasonable, it will be considering and considerate of the patient, patient access, the procedures that are done in that site of care, the products and the types of wounds that are actually performed in the office which are very different than the ones that are taken care of in the outpatient setting. If that bundle is reasonable and in considering those components which we believe it will, we think because of the breadth of our portfolio, the diversity of our portfolio, our commercial footprint, which is the largest in wound care, that will be well positioned to win in that reimbursement model. And continue to take share and continue to be the market leader that we are. So there's been a bundle in the outpatient setting since 2014. We are the market leader there. If there is a bundle in the office we're prepared to deal with that.

It might be too early to ask this question. But a reasonable bundle, what does that necessarily mean? And kind of your reminder from a commercial perspective?

So patients are moving into the office. The market is expanding in the office. So patient access is critical. And the reason patients are moving there, one is preference and comfort. But also the number of products that are available in the office is different than what's available in the outpatient setting. So taking away access or taking away products that currently are taking care of these patients in that site of care is something that needs to be considered. And we assume that it will be reasonable and that they won't be denying access to patients. And they won't be denying certain wound types like larger wounds that are treated in the office that really can't be treated in the bundle in the outpatient setting. So that's what we mean by reasonable. The products are different. The procedures and wound types are different. And the volume of patients are different. And all of those things would need to be considered for it to be reasonable.

And I'm sure you're discussing with CMS or have responded to the proposal. But I mean, when you're kind of looking at the proposal, can you just help us rank maybe what might be more of the larger headwind down to the lower headwind? And maybe just also help us frame kind of what the best case scenario is [indiscernible] proposal or no finalization? And maybe kind of what the worst case is for the company?

Well, because of the missing pieces I think describing best case, worst case is a bit of a challenge. But clearly, if you're going to have a bundle you need to define what's a typical wound because you're going to have a one bundle payment. So because of the diversity in the types of wounds that are treated in the office, considering all of the types of wounds and the sizes of those wounds need to be considered in the pricing of the bundle. You also need to consider the threshold of getting into the bundle. So in the outpatient setting you have a two bundle system a high and a low. And that's designed because there's different modalities, different pricing. You need to have some sort of threshold to get into the bundle whether it be a two bundle system or one bundle system. So those are the key things that really will drive how well those sites of care will be able to be treating patients the way they are treating them now.

And would you kind of expect maybe some vendor consolidation if the proposal goes through?

Yes. I mean consolidation was happening prior to the proposed rule and we see that would definitely accelerate.

Maybe for Gary or Dave, but maybe to shift gears to 2022 guidance for a moment. But maybe let's just spend a few minutes here on the second quarter guidance revision. Maybe just help us better understand kind of the moving pieces there. It looks like there was some stepped-up competition. But it sounds temporary. But would love to kind of get a better sense of maybe what you're seeing now and just being about a month I guess since you last reported. I mean, are you incrementally more confident that things are panning out as you're expecting?

Yes, we've certainly seen some noise in the market, some competitive noise that slowed our national launch of Affinity. We see that being transient. It's not something that we expect to continue. In a published ASP environment, aggressive pricing, rebating, those kind of things are short-lived. And we expect that CMS will eventually publish all ASPs that are been reported. And that will eliminate that competitive noise. But even with the noise, we still are on track with our launch as it relates to a number of customers. We're aggressively adding customers and that's really the long-term growth driver for the product. And we've just trained our entire sales force literally 3 weeks ago. We had about 40% to 45% of our sales force was not selling Affinity and they are now selling Affinity. And we have a new marketing campaign and then 40 more additional sales representatives hitting the streets in Q4. So we feel pretty comfortable that even with a little bit of competitive noise that we'll sell through that pretty nicely. And we're already seeing since the national sales meeting where we trained all of our reps, we're already seeing the increases in Affinity.

And maybe just on that adding customers component. I mean, obviously, it's kind of early days. But maybe with some of the more tenured customers using the product. Can you just talk about maybe what utilization you're seeing? I know there's the competitive noise. But are there any green shoots that you can kind of point through that kind of give you that confidence that this is a really great launch for the company?

Well, the product is great. The clinical results with the product have been extraordinary. So the product works and that's the most important thing. We're adding the number of accounts that we expected even with about 40% of our sales force not actively engaged until 3 weeks ago in selling the product. But it's the productivity that you want to start to see moving up. So getting an account established and then eventually seeing the productivity in that account as it relates to the Affinity product is what you want to see and we're starting to see that now. So we have the accounts. We're now starting to see the improvement in productivity.

And maybe one of the other dynamics that looking at the second quarter was PuraPly kind of continues to be the bright spot in the portfolio. But maybe what's driving the success in the product in the quarter? And maybe your confidence to raise guidance by about $40 million? It just seems like you're always able to squeeze out a bit more out of PuraPly.

The brand itself is just really strong. We have a number of SKUs that we've issued and they all performed extremely well. The product is unique. It's purified collagen with a broad spectrum antimicrobial. There is no competition in the skin substitute space. It's not designed to be used on wounds like an Affinity or an Apligraf. It's designed to take a wound out of the inflammatory stage. So the way a wound heals, there’s 3 basic stages is the inflammatory stage where most of the wounds get stuck in that stage and never go on to healing and then you have the proliferative and remodeling stage. But if you can't get out of the inflammatory stage the wound will not go on to heal. And the reason wound stay in that stage is because of biofilm and bioburden and infection. And PuraPly is designed to eliminate the reformation of biofilm. And so it allows that wound to stay without that biofilm for 7 days until you come back for the second treatment. And then the clinician can continue to move the healing all the way into the proliferative and remodeling phase. So there's really no other product like it. And it allows us to get the patient early and then hopefully keep that patient to healing. If it heals with PuraPly, so be it. If not, we have our amnions dehydrated and our living amnion. No one else had living amnion. And we're the only company with living bioengineered skin which is Apligraf, the gold standard in wound care.

Maybe sticking with PuraPly for a moment. But can you maybe talk about the MZ market? How should we be thinking about that maybe as a submarket within the broader PuraPly category? And will that also kind of really be focused in the office setting? Just any thoughts or views.

So PuraPly MZ will be primarily in the OR. So it's for deep tunneling wounds I mentioned earlier. I think there's over 50 million surgeries in the U.S. about 30% of them are open, closed by secondary intention. And P PuraPly MZ is a great option for filling those wounds. And then you can also use PuraPly AM which is the antimicrobial version over that wound at the same time to prevent the biofilm and bioburden in potential infection of that wound. So it will be OR based. It will be another opportunity for us to build the OR bag and it will be a nice adjunct product for PuraPly AM in the surgical suite.

So forgive my ignorance here but kind of with MZ. Obviously, a huge number of procedures happen in the U.S. But maybe kind of what's the gating factor for getting 100% of those? Is it really just replacing current standard? Or is it really just feet on the street talking to surgeons and getting into their hands?

I think it's more feet on the street at this point. It's getting the technology in their hands and getting them the experience not only with the MZ product but the combination also with PuraPly AM, the positive impact that can have on those acute surgical wounds.

Maybe to go back to Affinity for a moment. I think you've talked about previously the expectation that Affinity could surpass PuraPly in potential revenue for the company. Just do you still have that level of confidence? I mean, I guess you're always constantly raising PuraPly. Just would love to hear kind of your latest view there. I have a follow-up to that one.

Yes. I think the view there is that the PuraPly franchise has performed extraordinarily well as you said. So we're up 84% in the second quarter and up 55% in the half. So we do keep increasing that bar for Affinity. But as Gary said, the clinical evidence that we're getting and feedback we're getting on Affinity is fantastic. So the product's got great efficacy and we're really kind of scratching the surface on that national launch. So we've got a long way to go, I think from a growth standpoint for Affinity.

And maybe going back a couple of quarters. I think there was more talk about adding manufacturing capacity for Affinity. Are you where you want to be now? And is that still a barrier for the company in terms of thinking about the broader commercial launch?

Yes. No, not at all. I think in '21, we really wanted to double our capacity and the ops team beat that. And so we feel very good about our current demand and future demand for that product.

Maybe to go back to some of your earlier comments on the commercial infrastructure and sales force. So I think the target is about 390, maybe 400 reps by say 390 by the end of this year. Really kind of what's the right number longer term for the company? I mean you have drivers in multiple settings. But is that 500, 600? Just help us kind of frame that? And then second, maybe just remind us of what productivity per rep actually looks like on a fully tenured basis and how [indiscernible] that gets there?

I mean I think we've had a lot of success with the commercial resources continuing to build those. I think it's a great investment given the opportunity set that we have in front of us particularly in the office setting. And as Gary mentioned, the surgical setting as well. So we'll continue to assess that based on the market conditions. But we think we'll continue to invest in the commercial infrastructure. We think also bringing pain in would require a separate sales force as well as burn. So we continue to assess that as we kind of move forward. But again, I think it's a pretty good investment to your point about productivity. It's well north of $1 million of a rep. So we feel like it's continued to be an opportunity for us going forward.

And maybe just to hit on some of the pipeline for a moment, just with ReNu and TransCyte. But any update on time lines for ReNu? And does renew catalyze and reflect growth in the segment or in like surgical sports medicine?

So the trial was going very well. We expect to have enrollment completed by the end of Q4. We'll have our first interim analysis in Q4 which is 50% of the patients treated and assessed. And then we'll have a meeting with the FDA and hopefully get some insights at a high level of how the trial is progressing. So ReNu is incredible potential product for the company. So it's for knee osteoarthritis. That market is about a $2 billion market. Right now, the solutions are hyaluronic acid and steroids and pain killers. So not a lot of solutions in hyaluronic acid has a 40% nonresponse rate, steroids have a limited time horizon to the potential impact and potential deteriorating effects on tendon. So we think it's ripe for a new technology. And if approved, we still have to get it approved obviously and reimbursement. It will be transformational for the company. We're also considering a second indication for hip osteoarthritis. And maybe filing that IND by the end of the year. We also have opportunities in the shoulder, in the foot for plantar fasciitis and for degenerative disc disease as well. So we're assessing all of those other indications. But knee osteoarthritis alone could be transformational for the company if we're approved.

And with the interim look in the fourth quarter, could you think about maybe back half '23 approval by FDA? Or just any sense on approval patients putting aside reimbursement?

Last patient, last visit is scheduled for Q4 of '23. So we would expect approval in '24 and then hopefully, reimbursement shortly thereafter. So no contribution until 2025.

And with the study is that actually a head-to-head against HA?

No, it's against standard of care which is sailing.

Maybe on TransCyte kind of similar question. But any update on timing for that product for burn?

So we have a soft launch, we call it a clinical experience launch going on now with some of the top burn surgeons in the country. But our national launch for TransCyte is dependent on our manufacturing facility. So we made Dermagraft and TransCyte in La Jolla, California. We shut that facility down last year and are going to relaunch Dermagraft and TransCyte when we finish our new facility in [ Canton ]. That's the strategy. So we can't make it to scale so we don't want to launch it until we can make it to scale.

Maybe just to move to capital allocation for a moment. But you referenced the last transaction that you did for physician offices. But just kind of curious about how you're thinking about M&A in the current environment? Are you kind of looking more for your traditional wound care or your advanced wound care segment or surgical sports medicine? Just how are you kind of thinking about that? And would you want something more on the revenue-generating side? Or are you kind of open to some science experiment?

So we're certainly open to looking at transactions and there are a lot of transactions available in the market. So we are aggressively assessing anything that we think might enhance our portfolio or our commercial strength. Our focus is surgical. Certainly, revenue is important. But what's more important is the technology that is differentiated, that it works within our portfolio and commercial infrastructure and reach. Getting an asset that has reached into that surgical suite or has a lead product that could be helpful in getting into that site of care would be of high interest.

To put Dave on the spot and maybe talk about 2023 and not necessarily guidance specifically, although you're welcome to share anything. But what are kind of the big moving pieces? And how do you kind of think about '23 at least? And maybe at least the longer-term guidance that you've laid out of low double digits?

Yes. So I think in any year there's puts and takes. So there's definitely a series of moving pieces. We're a little bit early for us to be talking about '23. But the long term we haven't changed our dynamics around that. I think from a growth standpoint, we're still in the low double-digit range. We think some of the things we talked about today was obviously the Affinity product, the strength in there. Novachor and the soft launch. It has also got some very strong early clinical feedback which is great. So we're excited about that product. PuraPly has been performing well. So again, all that is in the calculus of the double-digit growth. We've got a good margin profile as well. Gross margin came in at a record in Q2. So we feel great about that and are still setting our sights for greater than 20% EBITDA long term.

But on 2023, I mean, you're adding reps in 2022 getting to 390. Should we expect a similar ramp hiring patterns for next year?

Yes. I think as I mentioned we'll just have to assess that as we go. So I think it's a good investment. There's no question about it. But as we continue to grow that we're going to get more selective as to which territories and regions we're investing in to make sure that there's the appropriate return out there.

I really appreciate the time. Thanks for joining us today.