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

Welcome, ladies and gentlemen, to the second quarter 2026 earnings conference call for Organogenesis Holdings Inc. [Operator Instructions] Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A, Risk Factors, of the company's most recent annual report and its subsequently filed quarterly reports. You are cautioned not to place undue reliance upon any forward-looking statements which speak only as of the date made. Although it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. I would now like to turn the call over to Mr. Gary S. Gillheeney, Sr., Organogenesis Holdings President, Chief Executive Officer, and Chair of the Board. Please go ahead, sir.

Thank you, operator, and welcome everyone to Organogenesis Holdings' Second Quarter 2026 Earnings Conference Call. I'm joined on the call today by David Francisco, our Chief Financial Officer. Let me start with a brief agenda of what we'll cover during our prepared remarks. I'll begin with a brief review of our results and key developments in the second quarter and in recent months. Dave will then provide you with an in-depth review of our second quarter financial results, our balance sheet and financial condition at quarter end as well as our financial outlook for 2026, which we updated in our press release this afternoon. Then I will provide you some closing comments before we open the call for your questions. Let me begin with a review of our results and key developments in Q2. Our revenue results reflect the significant contraction and slow pace of recovery in the skin substitute market as a result of the actions and comments from CMS in late December of 2025. Total revenue declined 58% year-over-year in the second quarter, driven primarily by a 61% decline in sales of our Advanced Wound Care products. We were pleased to see measured improvement in our business trends in the second quarter. On balance, we were encouraged to see the operating environment improve from what we experienced during the first quarter. Net product revenue increased 18% quarter-over-quarter in Q2, driven primarily by a 23% sequential increase in sales of our Advanced Wound Care products. As a leader in the industry, we leveraged our most comprehensive portfolio across multiple FDA classifications, including the only biologic PMA-approved product, Apligraf, to enhance our market share position with a 30% increase in wound care unit volume on a quarter-over-quarter basis, outperforming the declines that have been reported across the board in the industry. That said, revenue results for Q2 were below the expectations we outlined in our first quarter call. We attribute the majority of this performance to a slower pace of recovery from the significant contraction in the skin substitute market as a result of the sweeping changes from CMS to reform coverage and payment. The prolonged recovery has also prompted us to make important strategic decisions that are intended not only to reduce our cost structure, but also better position Organogenesis for success going forward. While operating and financial results in 2026 have been significantly impacted by the contraction in the skin substitute market this year, I want to make it clear that I remain very optimistic about our future. CMS' efforts to overhaul coverage and payment for the skin substitute market have addressed the waste, fraud and abuse from bad actors exploiting the system. With the proposed hospital Outpatient Prospective Payment System and the physician fee schedule announced last month, we believe CMS is now seeking to promote stabilization in the market. They've held payment rates steady. They've reinforced the differentiation of PMA products and the importance of clinical data in determining coverage. And we applaud these actions and look forward to expanding access to patients who need these products. With more than 40 years in regenerative medicine and the most diverse evidence-based portfolio with technologies in each FDA category, we believe we are best positioned in the skin substitute market and will continue to be a leader in the space with the best evidence-based portfolio on the market. It is from this strong long-term market position that we are making important strategic decisions and prioritizing our investments that will support our company's future growth and continued leadership in this market. We are increasing our focus on clinical evidence with new published studies because science and evidence have been and always will be the core of our foundation. As coverage policies evolve, evidence will be the currency of credibility, and we intend to remain in the lead. Importantly, we continue to advance our strategic initiative to expand the company's mission into entirely new markets with the ReNu program. Recently, the FDA formally accepted Amnuvx as the proprietary trade name for the biologic product previously known as ReNu. And if approved, Amnuvx will establish a new market category for a biologic product representing a transformational opportunity for Organogenesis in the more than 30 million Americans living with symptomatic knee osteoarthritis. Let me share a few updates on our progress in each of these important strategic initiatives in recent months. The compelling clinical results from our RCT evaluating the safety and efficacy of PuraPly AM in the management of non-healing diabetic foot ulcers, or DFUs, was submitted for publication. The results of this 170-patient study showed statistically significant DFU wound closure at 12 weeks. We believe publication of these impactful results will strongly support PuraPly AM's inclusion in any future coverage policies, underscoring its critical role in the wound healing algorithm. The RCT is complemented by an additional exciting publication in the Journal of Wound Care showing reduced rates of non-traumatic lower leg amputation among Medicare beneficiaries with DFU treated with PuraPly AM versus standard of care. The use of PuraPly AM in nearly 11,000 patients was associated with a statistically significant 20% lower overall amputation rate and an even lower 40% rate for amputations above or at the level of the knee. These new studies build on a significant body of evidence of clinical benefit of PuraPly AM, adding to the previous publications on comparative effectiveness research and a prospective analysis of a large patient registry. Together, this compelling evidence spans more than 23,000 patients studied, reflecting both the primary and supporting data CMS considers when making coverage determinations. On July 27, we announced peer-reviewed results published in the Journal of Wound Care demonstrating Affinity's benefit in the most challenging and complex venous leg ulcers, or VLU. The data showed statistically significant improvements in wound closure at 12 and 16 weeks for Affinity plus standard of care across both wound duration groups studied, offering compelling new evidence in one of the hardest to treat populations in chronic wound care. These results reinforce Affinity's benefit in the hard-to-heal wounds, the population that drives the greatest clinical burden and cost in VLU treatment. As those costs continue to rise, particularly within Medicare, this is a meaningful step forward for patients, clinicians and payers. Complementing our existing diabetic foot ulcer data, these results add to a growing body of RCT and real-world evidence that strengthens the case for expanded coverage across two of the most common costly wound types. With respect to our recent progress in our Amnuvx program, on July 6, we announced that the FDA accepted our biologic license application for Amnuvx and has set a PDUFA target action date of April 24, 2027. We believe this highly differentiated regenerative therapy has the potential to meaningfully change the treatment paradigm by offering a nonsurgical biologic option designed to address pain and improve function, particularly in patients with severe disease who lack approved nonsurgical options, and we look forward to continued engagement with the FDA as they complete their review. Before turning the call over to Dave, I want to comment on our updated outlook and important strategic decisions we've made subsequent to quarter end. We have updated our expectations for total revenue in 2026 in this afternoon's press release. While we continue to expect improvement in our revenue results on a sequential basis in the third and fourth quarters, our 2026 revenue guidance now reflects the expectation that we see a more measured pace of recovery as compared to what was contemplated in our prior expectation for total revenue in 2026. Given the impact of a prolonged recovery on our revenue expectations, we completed a restructuring in June. The restructuring included a workforce reduction of 138 employees and is expected to result in cost reductions of approximately $18 million on an annualized basis. This is our second restructuring announced in 2026, which together are expected to reduce annual operating expenses by more than $32 million on an annual basis. Importantly, the benefits of these activities are not limited to expense reductions. Rather, we believe our commercial team is now positioned to maximize the opportunity ahead as the skin substitute market expands from the recalibration over the first half of 2026. With that, let me turn the call over to Dave.

Thanks, Gary. I'll begin with a review of our second quarter financial results. Unless otherwise specified, all growth rates referenced in my prepared remarks are for the 3-month period ending June 30, 2026, and are on a year-over-year basis. Net product revenue was $42.8 million, down 58% year-over-year. Our advanced Wound Care net product revenue was $36.1 million, down 61%. Net product revenue from Surgical & Sports Medicine products was $6.7 million, down 18% year-over-year. Our total revenue results included $1 million of income related to the grant issued by the Rhode Island Life Sciences Hub, offsetting our employee-related costs in our Smithfield facility. This compares to $0.2 million in the prior year period. Our second quarter results reflect notable improvement in growth trends on a sequential basis. Specifically, our total revenue increased 18% quarter-over-quarter, driven by a 23% increase in sales of Advanced Wound Care products. Gross profit was $19.1 million, or 45% of net product revenue, compared to 73% last year. Cost of goods included $1.8 million of restructuring-related charges. Excluding these adjustments, non-GAAP gross profit was $20.9 million or 49% of net product revenue. Operating expenses were $94.7 million compared to $113.6 million last year, a decrease of $18.8 million or 17%. Excluding cost of goods sold of $23.7 million for the second quarter and $27.6 million last year, our non-GAAP operating expenses were $63 million compared to $83.4 million last year, a decrease of $20.4 million, or 25%. The year-over-year change in operating expenses excluding cost of goods sold was driven by a $19.8 million or 27% decrease in SG&A expenses, offset partially by a $7.9 million or 76% increase in research and development expenses. Note, the second quarter R&D expenses included $5.6 million of non-recurring termination costs associated with various R&D programs and vendors. Operating expenses excluding cost of goods sold declined $9.3 million or 12% on a sequential basis, driven primarily by the company's March 2026 restructuring. By way of reminder, the March 2026 restructuring is expected to reduce our operating expenses by approximately $13.4 million on an annualized basis. Operating loss was $51 million compared to an operating loss of $12.6 million last year, an increase of $38.4 million. Excluding non-cash amortization and certain non-recurring costs in both periods, our non-GAAP operating loss was $41.1 million compared to $10 million last year, an increase of $31.1 million year-over-year. GAAP net loss was $96.3 million compared to a net loss of $9.4 million last year. Note, GAAP net loss in the period includes approximately $30 million of noncash tax expense related to the recording of full valuation allowance on the company's deferred tax assets. Net loss to common stockholders was $99.3 million compared to a net loss of $12.2 million last year. Net loss to common stockholders includes the impact of the cumulative dividend and the noncash accretion to redemption value on our convertible preferred stock. Adjusted net loss was $89 million compared to $7.5 million last year. We've included a detailed reconciliation of GAAP to non-GAAP adjusted loss in our press release this afternoon. Adjusted EBITDA loss is $34.4 million compared to adjusted EBITDA loss of $3.6 million last year. Turning to the balance sheet, as of June 30, 2026, the company had $46.8 million in cash, cash equivalents and restricted cash and no outstanding debt obligations, compared to $94.3 million in cash, cash equivalents and restricted cash and no outstanding debt obligations as of December 31, 2025. We expect that our cash on hand and other components of working capital as of June 30, 2026, plus net cash flows from product sales, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months. Today, the company entered into an ATM agreement with BTIG and Citizens JMP Securities, pursuant to which the company may offer to sell shares of its common stock, having an aggregate offering price of up to $75 million from time to time through sales agents. Sales under the ATM agreement, if any, will be made pursuant to the company's effective shelf registration statement on Form S-3 and related prospectus supplement. The company intends to use these net proceeds from any sales under the ATM agreement for working capital, general corporate purposes, research and development activities and other strategic initiatives. Turning to our 2026 outlook, which we've updated in this afternoon's press release. As Gary outlined earlier, our 2026 total revenue guidance now reflects the softer-than-expected results in the second quarter and the expectation that we see a more measured recovery in the overall operating environment as we move into the second half of the year. As a result, we now expect total net revenue for the full year of 2026 of $179 million to $215 million, representing a decline in the range of 62% to 68% year-over-year and compared to our prior guidance range, which assumed a decline in the range of 45% to 52% year-over-year. Note our total revenue range assumes sales of Advanced Wound Care products in the range of $151 million to $183 million, sales of our Surgical & Sports Medicine products in the range of $26 million to $30 million and grant income of $1.9 million. Our updated total revenue guidance continues to reflect the expectation that we see sequential improvement in our revenue trends in the third and fourth quarters, however, at a more measured rate versus what our prior guidance has assumed, resulting in a second half revenue decline in the range of approximately 64% to 74% year-over-year. With respect to our profitability expectations, our updated guidance continues to assume improving quarterly adjusted EBITDA performance on a sequential basis, which is expected to result in nearly 60% reduction in adjusted EBITDA loss in the second half of 2026 as compared to the first half of 2026 at the low end of the range and more than 90% reduction in adjusted EBITDA loss in the second half of 2026 as compared to the first half of 2026, including the expectation of positive adjusted EBITDA generation in the fourth quarter. Given the lower revenue expectations for 2026 and the related impact on gross profit, we have adjusted our assumptions for operating expenses, excluding cost of goods sold, to reduce the impact on our profitability and cash flow this year. Specifically, we now expect to reduce our operating expenses excluding cost of goods sold approximately 32% year-over-year in 2026, including more than 40% year-over-year in the second half of 2026. Note these updated assumptions are inclusive of estimated cost savings in the third and fourth quarters related to our March 2026 and June 2026 restructurings of approximately $7 million and $9 million, respectively. With that, I'll turn the call back over to Gary for closing remarks.

Thanks, Dave. With more than 40 years in regenerative medicine and the most diverse evidence-based portfolio with technologies in each FDA category, we believe we are best positioned in the skin substitute market and will continue to be a leader in the space with the best evidence-based portfolio in the market. The competitive landscape has changed dramatically in just a few months since CMS announced sweeping changes to coverage and payment policy. Distributor-driven competitors, high-priced amniotic players and companies engaged in fraudulent practices have been substantially reduced. Many of the remaining players are diversifying away from wound care or exiting the category altogether. Organogenesis is doubling down on wound care. We are leaders because our business is built on efficacy and outcomes, and that is driving our expanding share as the market resets. Customer trust matters now in this new market more than ever before, and simply put, we believe we have the best evidence-based skin substitute products in wound care, bar none. We expect to enhance our leadership position by leveraging our portfolio to provide integrated healing solutions that substantially improve outcomes while lowering the overall cost of care. With that, I'll turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from Ryan Zimmerman from U.S. Bancorp.

Gary and Dave, this is Izzy on for Ryan. I just want to start to get kind of your higher-level thoughts on the broader market dynamics and what is going to give you confidence that Medicare is working to stabilize the market beyond just what we've seen in the OPPS proposal.

So this is Gary, Izzy. So what we're seeing is month over month, we're seeing continued growth in the space. We're seeing more clinicians getting more comfortable with the current coverage and payment structure that's in place now. We still have a ways to go. And CMS reinstated the $127.14 reimbursement rate. I think they did that with the intention of stabilizing the market and bringing consistency to the market. They also continue to identify the tiers where they recognize PMA products and 510(k) products and the 361. So maintaining that tier structure is also bringing stability and signaling evidence is still an important function here and will carry weight going forward. So we think the stability, recognizing PMA products and we're starting to see more clinicians starting to use at least our product as we continue to take a fairly significant share in both the first and second quarters.

That's helpful. And as we start to think about the back half of the year, I was hoping you could speak a little bit more about the pacing that's baked into guidance for third quarter and fourth quarter?

Yes, sure. This is Dave. Yes, so, as Gary mentioned, we were pleased with the strong sequential growth that we saw between Q1 and Q2. Obviously, as we talked about up fairly significantly in Advanced Wound Care units, up 30%. So that's coming off the Q1 trough. So our expectation is that the movement from here would be continued share gains, but more modest and obviously the growth on a sequential basis would be much more modest than what we'd anticipate or what we experienced in the first to the second quarter. So we see some modest growth into the third quarter with a little bit more strength in the fourth.

Helpful. And if I could just squeak one more in. Could you speak to what products are actually being paid for versus what might be held up in the market, whether it's synthetics, amniotics, anything you can provide there?

We don't really see any particular product being held up. The concern is postapplication upon audit, would there be a potential clawback on those products? And what we're seeing in the market is products without RCTs are at significant risk. Sometimes -- many times, they're considered investigational. So clinicians are getting very concerned about products without RCTs. There's a flight to quality, which is why we're seeing the 30% growth that we're seeing in the market share gains because our products have significant evidence. So we think it's more postapplication that clinicians are concerned about the clawbacks and the potential paybacks for products that just don't have evidence in the space.