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

All right, welcome, everyone, to the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analyst here. It's my pleasure to host this session with Organogenesis. I'm delighted to have Gary Gillheeney, the CEO and Chairman; and David Francisco, the CFO. Before we jump into it, just a brief disclaimer for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. With that out of the way, reimbursement is really kind of the first topic -- coverage and reimbursement is kind of the first topic that I wanted to cover today. And if we kind of circle back or I think back to last year, the elephant in the room was the CMS proposed rule for the physician office. And now it's really kind of the recent LCD from 3 MACs, which kind of is complicating the wound care industry and potentially soon your operations.

But Gary, first, maybe just talk about what happened given investors kind of the cliff notes of the proposal or the final rule and maybe the potential impact for the company?

Sure. So on August 3, 3 MACs issued an LCD, Novitas First Coast and CGS and they issued a policy regarding the use of skin substitutes for venous leg ulcers and diabetic foot ulcers that will go into effect if unchanged on September 17 of this year. There was about 190 products that were affected by that policy change, 130 of them were identified as noncovered and 5 of our commercialized products were part of the noncovered list. So it appears that CMS or the local MAC conclude that our products don't meet their definition of what a skin substitute is, which we clearly do. Their definition is basically a scaffold matrix that's applied and not replaced that allows for cell migration, which stimulates healing the wounds and clearly, our products meet those definitions and those qualifications.

Got it. And with the final rule taking effect September 17, we're clearly a few days away from there. I think that on the call, you laid out the potential financial impact. And I think, generally, consensus numbers have taken that into account for '23 and for '24. But maybe just help us better understand what efforts the company is making, the industry is making to combat or push back against the LCD change.

Certainly, most of the industry is pushing back, particularly the clinical community, and we have an internal and external team of experts that are working on this issue literally day and night. So we've provided the MACs with full dossier of our products, both the regulatory clinical characterizations and clinical efficacy data for each of our products that clearly demonstrates that the products do meet the qualifications in the definition. We've also met with all 3 MACs, we've met with the office of General Counsel at HHS that also described the reasons why our product meet the qualifications and also some of the procedural issues that we see with the ruling. We have an upcoming meeting with CMS, where we'll also identify some of the inconsistencies and procedural challenges. We'll ask CMS to intervene with the Local MACs and try to get these policies either rescinded or amended, so they appropriately affect patient care appropriately.

And when is the upcoming meeting? And just to pile on to that question, I mean the impact, I think, is again fully added numbers. But do you have any ballpark scenarios or probabilities in mind of whether or not you think it's going to happen and you're going to just have to push back with resolution over time? Or do you think there is a nonzero chance that they could really step back from the September 17 decision?

Well, we think because of all of the information that we've provided and the pushback from the entire clinical industry as well as support groups, legislation, legislators as well that we think that there will be some resolution before the 17th. We're not sure what that resolution will be. But our thinking is that our meetings will all be -- have all our meetings before the 17th. We have 1 left and we'll get some resolution by the 17th. And that resolution could include look into delay in implementation until let's say, it could be rescinded. It could be a delay. It could be moving products from the non-covered to the covered list once they provided the information like we have that our products clearly qualify and justify it on the covered list.

Okay. One of the things that's kind of struck me when I speak to wound care clinicians is just how much uncertainty in reimbursement or coverage changes can change physician practices and with the LCD being out there for a month, are you seeing any meaningful changes in third quarter to physician buying patterns or purchasing patterns into the 17th and maybe for Dave. I mean we got consensus that [indiscernible] is down 4% year-over-year, is [ Ryan ] and myself in the right position for how you're thinking about it.

Well, I'll say this. Certainly, we're seeing some clinicians hesitant to start a new patient on a healing algorithm just in the case that those last applications are going to be beyond the 17th. So it's affected us a little bit earlier than we had anticipated, but not materially different than what we talked about on the earnings call. As far as guidance is concerned, it was a difficult decision for us to draw guidance, but we don't have any guidance out there for Q3 or the back half. And so given the level of uncertainty right now, we're not able to comment on it at this point on it though.

And you brought up kind of the application aspect of the LCD. And I think it's going back to like 4 applications, if I remember correctly. It's part of the resolution and if they were even to keep 12 and is that kind of another avenue of upside for you?

It is, and it's clearly problematic moving from 10 to 12 -- 10 or 12 to 4, depending upon the MAC is extremely problematic. What it really does is it doesn't allow for the treatment of larger wounds, which are the more complex, usually the sicker patients. So what appears the MACs looked at the referenced study, which is a very good study by Dr. Armstrong and in that study, they indicated that the average number of applications for a wound is 4. So that's the mean. The problem when you utilize a mean is it doesn't consider the standard deviation, which are in this case, it is about [ 4 ] as well. So considering the standard deviation, the number of applications at a minimum should be 8. And if you don't have that opportunity, the larger wounds, the more sicker patients were not going to get treated. And a lot of the package inserts require more than 4 applications. So it's equivalent that if your physician gave you antibiotics for 10 days, but you're only able to use them for 4 days, you're not going to get the result, the patient won't get treated and you're basically costing the system money because it is not a wise use of funds. So the other challenge with the study, though, again, it was a very good study as it was in the outpatient setting in the HOPD model, which is a bundled model. And in that site of care is where you get smaller wounds treated because of that bundle system. The LCDs also cover the office and the office is where larger wounds are treated. So the study in that site of care is for only smaller wounds using the mean for smaller wounds as well as rally going to have an impact on patient care. So that is a real challenge, I think, for clinicians to be able to work within that. So we think that will continue to get challenged. And yes, it is more of an opportunity if more applications are able to be used for sure.

And when you think about the potential shift in clinical change, this could potentially push patient care back to the hospital, which is a more expensive site of care to begin with. I know that you've talked broadly about your strategy being focused on the physician office, and that's where you -- I've thought the growth opportunity would be. But I know it's early. How is kind of the LCD maybe altering your strategy or your thoughts looking ahead of the physician office versus hospital. I know you don't have resolution yet, but any kind of early thoughts on the playbook going forward?

Well, I think you're correct. I think it has the potential of pushing more patients into the hospital, which is not what you want to see. It's more expensive, but there's also still capacity issues in the hospital and hospitals don't want more patients in the ER with troubling wounds. So we still think that the office is a great opportunity. We still see that a lot of patients will be treated in the office. We think as CMS moves to what we believe will be ASP or most likely a bundling system I think patients will be able to be treated in that site of care. Certainly, the larger wounds better than they would be in the hospital setting. So still a great opportunity, it's 15,000 offices, it's 1,500 wound care centers. So it's still a real growth engine for the company. And once the market starts to settle down when these reimbursement changes are finalized, like a bundle in the office, we just think that treatments will have to move back into that office.

Got it. Maybe, Dave, for you as much as you want to comment on financial impacts for '23 and '24, I'll still ask the question. But you laid out on the call kind of a range of potential headwinds for '23 for the back half year and going into '24 as you've dug into the numbers more and look at the potential headwinds, as any kind of -- anything changed on that math of how you're thinking about even next year?

Yes, not materially, Drew. I mean what we showed there was what we had in the first 6 months. I think we talked a little bit about the seasonality between the first half and the second half, but it's in that range. And so nothing materially has changed from our views on the earnings call.

Okay. Maybe just to shift gears to some of the growth drivers looking ahead. But Gary, you're talking about CMS potentially moving towards a bundled payment, at least keeping ASP for the time being. On some of the calls you've talked about competitive headwinds in the physician office space and putting aside the LCD, it really sounded like the competitive situation is getting better as we progress through the year. So maybe just on that front, I mean what are kind of your current thoughts on the competitive landscape in the physician office. And there was talk about loss of market share, but any way you can size that opportunity and what it means for recovery.

So we certainly see a move to ASP plus 6 though slowly, which is helping. I think there's about 65 products now on the published list. I think they were about 16 or 18 or so at the end of last year. So not at the pace we'd like, but clearly starting to see the movement there. Where even with this recent LCD change, there are some products that are no longer available in the office. We think even with some changes in that LCD, there will still be a number of products that are not going to be covered that don't meet the criteria. So that just means more opportunity for companies like us with a broad portfolio, a very large footprint in the office that is to take share. And we think there's 15-plus percent market share available as a result of some of these changes. When you go to full bundling, we think that, that opportunity is closer to 20%.

And as you're speaking to clinicians, reimbursement folks, CMS, I mean, are you hearing in the [indiscernible] that the plan is to move to a bundling system, and that's what we should kind of expect for the 2024 proposed rule in July.

I think the answer is yes. I think it would have to be a bit of a phased approach. So you may not see full bundling into perhaps '26 but it's pretty clear that CMS wants to bundle in the office. They like bundling. That's kind of the direction they'd like to go. I think what they're struggling with is the number of products that are in the office, the sizing of the wounds, as I've mentioned a number of times, very different than an HOPD. So they've got to wrestle with those issues and where -- we've provided a lot of input on what we think the right bundling methodology would be, so you're not pushing folks back in the office and you're not eliminating the larger wounds and some of the folks that really need the products that we sell and other companies sell to solve their wound problems.

And maybe just to shift to sports medicine, surgical and sports medicine. The company has been in rebuild mode with the franchise shifting specialties and into new procedure categories. So where is the company today in terms of that rebuild phase, what inning are we in? And really, how are you thinking about the playbook for investing in the segment into the business, maybe ahead of renewal.

So we're still excited about our Surgical & Sports Medicine Business unit. It exceeded expectations in Q2 again. We're in year 2 of the rebuild. We've just hired a new head of our Surgical Sports Medicine business. We have a lot of experience in the space. We're aggressively attacking opportunities now that we have that infrastructure and that leadership and we see the playbook in that space ahead of renew is you really need to have contracts to be successful. In the biologics space, you need larger products which can be a challenge. Fortunately, we have the ability to create those larger products. You also need products that persist more with greater tensile strength in the OR and they need to be shelf stable. They need to be on the shelf, particularly as it relates to trauma and some other soft tissue as we're pivoting from a fusion kind of sports medicine, more orthopedic to soft tissue. So as you move into that soft tissue market, you just need to have the products with the size, the tensile strength, the persistence and shelf stable and you need to attack it, both with direct and agency kind of distributor relationships, the directs to build brand equity, training, how to use the biologics, and you really need the agencies to cover the market and make sure product is on the shelf and you have enough coverage quickly to be able to attack the market. So we think that's the playbook. That's the direction we're heading and the business unit continues to perform well.

Have you talked about on the -- like what percentage of the direct sales force is actually really covering the Surgical Sports Medicine business at this point.

It's not large today, it's about 30%. So we see that probably doubling and our agency business right now is about 75 to 80 agencies. Each agencies, 2 to 3 feet on the ground. We'd like to see that double. So we're building both the direct and the agency side of the business.

And that doubling is that over the next couple of years, 18 months?

18 months.

Okay, okay. And if you back -- back to Dave, another financial question for you. But before the LCD, you did plan to reaffirm your prior guidance. And essentially consensus has kind of left the Sports and Surgical numbers the same. I mean it shouldn't be impacted by the LCD. But it doesn't necessarily sound like anything has changed in the way you're thinking about the Surgical and Sports medicine outlook per se. So what gave you kind of that initial confidence in the back half acceleration before kind of the full guidance was pulled?

Yes, sure. As you said, we didn't change the guidance at all for SSM and the LCDs don't change that at all. So our view is that, as Gary mentioned, the business performed very well in the first half. We're excited about that continued build up. We're excited about the new head of the commercial resources there and we think there's some great opportunity ahead of us. I think in the back half, as Gary mentioned, some of the things that are key for that marketplace are really connected to our PuraPly franchise. And so we see that continue to accelerate growth into the back half.

Okay. And we do expect to launch 2 new products next year in the first half of the year, which I think will be very impactful.

Can you -- there was going to be a question downstream. But while we're on it, can you talk more about what kind of these 2 new products are line extensions or something more revolutionary in the portfolio.

I can talk a little bit about it. I don't know too much about it, but it speaks to the size and the thickness and tensile strength that we believe is critical in the additional PHMB or the additional antimicrobial capabilities when you have thicker larger pieces. So you get the persistence of that antimicrobial impact which is important for particularly soft tissue, surgical wounds as it relates to SSI, surgical site infection. So we think those products are addressing that size and thickness, and additional antimicrobial capabilities that really no other product has like PuraPly brand.

Yes, that was going to be the follow-up, but it's built around...

Year-over-year.

Okay. Got it. Maybe just on the commercial infrastructure. I think you ended the second quarter with 365 reps. So it's down a bit off your high, about 15%. But I think one thing that's kind of struck me as I'm looking at numbers is like despite a reduction, I mean, you're actually seeing your productivity kind of remain steady at $1.2 million, $1.3 million. So how are you thinking about your rep productivity? I mean looking ahead, I mean we generally see implant device companies do $1.5 million to $2 million, sometimes $2.5 million. But how are you kind of thinking about productivity levels and where you could actually see a peak in your direct sales force?

Yes. We did drop down some earlier this year. And you can see, again, the productivity levels are holding as far as that distribution of productivity. It depends on the region, the rep, the product portfolio and those types of things that are selling in those different areas. But -- so that's obviously the average, but we see a lot of opportunity to continue to improve productivity going forward, just given all of the direction of the company, as Gary mentioned in SSM and continue to reconsolidate share and such, as he mentioned also earlier. So we see some real opportunity there.

And is it more just filling out the bag and giving them -- maybe having more wallet, more procedure wallet share? Just anything on what's really going to drive the underlying productivity?

Yes. I mean I think it is additional things in the bag. As Gary mentioned, a couple of new products come out next year. Obviously, those will be in the surgical setting, but we're building up that direct team, but also, again, that reconsolidation of share in the wound care space could be a big player driver in that area as well.

But it is getting deeper into the wallet. So the reduction that we did earlier was to actually improve performance. So we want to go deeper. So we actually measure rep productivity all the way down to contribution margin per rep. So if we're not seeing what we want, we're going to intervene. We're going to look at the territory, realign territories, could be training, could be getting deeper into the accounts, could be replacing the representative if that's the case but we constantly try to get deeper and deeper into the account because we have such a large portfolio. And to your point, when we add more products, we continue to get deeper, that productivity goes up. And we want to see the productivity go up before we expand. Get that EBITDA margin that you always ask me.

And with going deeper at the account level, I mean, is it just really kind of finding that key opinion leader champion of the accounts? And then disseminating that down to other clinicians at your account or just any views on how -- what the strategy is in terms of actually really going deeper for what you typically see?

Well, we have such a large share of voice because of the size of our footprint in wound care, probably the largest sales force in our space. And we have great relationships. Fortunately, for us, turnover in our sales organization is below the industry average. So we have long tenured relationships with clinicians. We do have strong KOL, opinion leader support as well. But our reps spend a lot of time in the clinic because of our portfolio belong larger share of voice we have, the more opportunity we have to go deeper into the account and to help keep competition out. So it really is the relationship and the share of voice, the time that we require our reps to spend in an account versus continually moving to other accounts.

Got it. And then just on the sales force expansion, which has been a growth driver aside from productivity gains, you're at 365 now, 30 of those reps are more surgical sports med focused. How are you thinking about maybe the core wound care rep expansion looking ahead?

Go ahead...

No, you want to take...

I was just going to say, just given the circumstances right now, we're just on a pause mode here. But clearly, there's a tremendous amount of incremental opportunity to expand the market and the best way to do that is through incremental awareness about the advanced modalities that we have. And so the larger sales force you've got, the better off you're going to be from expansion standpoint. The issue is right now, just given the uncertainty, we're slow and being selective about that, any kind of expansion at this point.

Got it. Gary, you touched on pipeline a bit with the 2 new line extensions for PuraPly in '24. I'll call them line extensions. It sounds like it could be a little bit more than that. But maybe just talk about renew. I mean that seems to be one of the other key pipeline products looking ahead. Maybe where are we in the FDA conversations and potentially seeking a second trial or being able to skip that?

Sure. So we are extremely excited about renew. If successful, will be transformational for the company for sure. So where we are, we completed our interim analysis in July and that analysis indicated that the trial could continue, and it was powered appropriately. We didn't have to add any additional patients so that was really good news. Last patient, last visit for the first Phase III will be the end of this year. So we're excited about that, and we're on track. First patient, first visit for the second Phase III trial will be this quarter. So we've already had approval for that second trial and we're moving forward. We will be seeking a meeting, a type B type meeting with the FDA to try to convince them that our 200-patient Phase II trial and the efficacy data that we should have some efficacy look in the first half of next year that the combination of those 2 is enough for a BLA filing and approval. And if so, the product will be commercialized if approved in '26, if we have to go through the second trial that would add a year. So we would be looking at Q1 of 2027. If both trials, both Phase III trials have to be completed to be commercialized. But we are hoping that in that meeting with the FDA that we'll be able to convince them with our 200-patient study and the 510 patient Phase II -- Phase II and Phase III study that -- that's enough clinical evidence for a BLA approval.

Is that meeting already kind of on the books?

It is not. Okay. We have to finish the efficacy review, which would be the first half of the year. And once we have that with the Phase II trial data, which we obviously have, then we'll be able to sit down with them and review it. So really no time line update until the first half of next year. Yes, essentially.

Okay, okay. Dave, you're going to hate me. But I am still going to ask financial questions anyway. But with the guidance being pulled for '23, I'm not going to ask you about '22, I'm going to ask you about '24, but when you're looking at numbers today, I think $425 million for consensus, are you kind of hearing the message right in terms of your base business and then the risk factors for the potential LCM?

Yes. As I mentioned earlier, I think we laid out what happened in the first 6 months for DFUs, VLUs in those MACs. And so I think that's kind of the calculus for '24. But even if the LCD wasn't here today, it'll be a little bit early for us to be talking about '24.

Okay. I understand. Maybe one of the other things to point out is you're kind of still in limbo with the facility build-out, but we are getting close to the end of the third quarter, you did expect to give an update potentially. But anything you can share today in terms of your thoughts on a new facility?

Yes. As Gary mentioned in the call, we're involved in a bunch of development firms, really kind of looking at our existing campus in Massachusetts and also in parallel looking at other opportunities that we might have. That progress continues. Obviously, there's a lot of draw on the entire team, on the LCDs here, but we expect to have an update in the next several months.

Okay. We only have a minute left, and I just feel compelled to sneak in a GLP-1 question, just given the diabetic foot ulcer exposure the company has. But how are you kind of thinking about the impact of GLP-1. It's not going to necessarily be this quarter or next quarter type of impact, but it could be a longer-term headwind for the company in diabetes and the industry, frankly but just any initial views and your thoughts on GLP-1 effecting this space?

Yes. Look, I mean, I think it's an interesting product, obviously, and could have an impact on the business long term. I think you're right, it's not the next quarter or 2. So we'll continue to monitor as we move forward and see how successful that product is and what the impact is to our overall market.

Okay. We're coming up at time, so we'll cut it there. But Gary, Dave. Thanks for joining us today. Really appreciate it.

Thank you for having us.

Yes. Thank you very much.