Organogenesis Holdings Inc. (NASDAQ:ORGO) Q4 2023 Earnings Call Transcript
Organogenesis Holdings Inc. (NASDAQ:ORGO) Q4 2023 Earnings Call Transcript February 29, 2024
Organogenesis Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome ladies and gentlemen to the Fourth Quarter and Fiscal Year 2023 Earnings Conference Call for Organogenesis Holdings Inc. [Operator Instructions] Please note, that this conference call is being recorded and 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 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 -- excuse me, including Item 1A, Risk Factors, of the company's most recent annual report and a sequential filing with 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 a result of new information, future events or otherwise, except as required by applicable security laws. This call also includes references to certain financial measures that are not calculated in accordance with general accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliation 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.
Gary Gillheeney: Thank you, operator and welcome, everyone, to Organogenesis Holdings fourth quarter and fiscal year 2023 earnings conference call. I'm joined on the call today by Dave Francisco, our Chief Financial Auditor. Let me start with a brief agenda of what we'll cover during our prepared remarks. I will begin with an overview of the fourth quarter revenue results and an update on our key operating and strategic developments in recent months. Dave will then provide you with an in-depth review of our fourth quarter financial results, our balance sheet and financial condition at year-end as well as our financial guidance for 2024 which we introduced in our press release this afternoon. Then I will share some closing thoughts before we open the call for your questions.
Our sales results came in at the low end of our guidance range outlined on our third quarter conference call and reflects the expected challenging operating environment as a result of the local coverage determinations having been announced and subsequently withdrawn last fall. More specifically, our fourth quarter guidance range has assumed continued significant business disruption driven by customer confusion and uncertainty. As outlined on our last quarter's earnings call, we expected our sales reps to be spending more time servicing existing customers and regaining lost customers versus cultivating new customer adoption thus impacting our year-over-year growth trends in the quarter. Additionally, the higher end of our guidance range assumed improvement in the operating environment as we move through Q4 which ultimately did not materialize.
Despite the challenging quarter, we are pleased to see the positive momentum in the business trends we experienced towards the end of December continue into early 2024 and our commercial team continues to see progress in their broad-based efforts to reengage with our customers to bring our products back to the healing algorithms and formularies. We're encouraged by the evidence that the commercial support programs we implemented to enhance existing customer relationships and to regain lost accounts are proving effective. Importantly, we dedicated a majority of our time and share of voice during the fourth quarter towards clarifying the misinformation in the market. We have refocused our commercial resources to drive growth in our customer base by emphasizing our differentiated products in their clinical value.
Turning to an update on our operational progress in recent months. Our ongoing Phase III clinical trials evaluating the use of renew for the management of symptoms associated with neosteoarthritis continue to progress as planned. As a reminder, ReNu is a unique cryopreserved amniotic suspension allograft or ASA, containing viable cells, extracellular matrix and importantly, is rich and anti-inflammatory and regenerative growth factors. We achieved the last-patient last-visit milestone in January for the first Phase III clinical trial to evaluate the efficacy of ReNu for the treatment of symptomatic neosteoarthritis and preparations for the database log [ph] and analysis are currently underway. We are currently targeting the completion of top line data analysis by the end of April which we intend to share publicly via press release.
In 2021, ReNu received the FDA's Regenerative Medicine Advanced Therapy, or RMAT designation for osteoarthritis of the knee which underscores the strength of our existing clinical evidence and its potential to address a largely unmet medical need. And as previously discussed, we expect to have a subsequent discussion with the FDA regarding the clinical data requirements for the BLA and we intend to propose the first Phase III clinical trial, combined with the published 200-patient RCT as valid scientific evidence insufficient for BLA approval. We are also pleased with the progress we're seeing in our second Phase III clinical trial for ReNu. We now have 40 clinical sites up and running and have enrolled more than 200 patients to date. While it's difficult to predict the pace of enrollment with precision, our current time line has us achieving full enrollment in the first quarter of 2025 ahead of our original expectations when we started enrollment in the second Phase III clinical trial last September.
Additionally, consistent with our first Phase III clinical trial, we're on track to enroll between 25% and 30% of the most severe knee OA patient population, also known as KL4s. While there is no known treatment that completely cures NUA [ph], it is possible to treat the disease symptoms with the goal of avoiding or delaying costly invasive knee replacement surgery. If successful, ReNu would be the only FDA-approved biologic intra-articular injection to improve the symptoms of the most severe cases of OA. With that, let me turn it over to Dave. Dave?
David Francisco: Thanks, Gary. I'll begin with a review of our fourth quarter financial results. Unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net revenue for the fourth quarter was $99.7 million, down 14%. Our Advanced Wound Care net revenue for the fourth quarter was $93.2 million, also down 14%. Net revenue from Surgical & Sports Medicine products for the fourth quarter was $6.5 million, down 3%. Gross profit for the fourth quarter was $71.9 million or 72.1% of net revenue compared to 76.5% last year. The decrease in gross profit and margin resulted primarily from shifts in product mix compared to the prior year period and a decrease in the pricing for certain of our products.
Operating expenses for the fourth quarter were $73.2 million compared to $79.7 million last year, a decrease of $6.5 million or 8%. The decrease in operating expenses in the fourth quarter was driven by a $6.9 million or 10% decrease in selling, general and administrative expenses, offset partially by a $0.4 million or 3% increase in research and development costs compared to the prior year period. Fourth quarter GAAP operating expenses included $1.9 million of restructuring-related charges compared to $0.8 million in the prior year as well as $0.3 million of compensation expenses related to the retention for those sales employees impacted by the LCD compared to no such costs in the fourth quarter of 2022. Excluding these items, a non-cash intangible amortization of $1.2 million in both periods, non-GAAP operating expenses for the fourth quarter decreased $7.8 million or 10% year-over-year.
The material reduction in our non-GAAP GAAP operating expenses reflects our proactive strategy to manage cost in light of the challenging operating environment. We made these difficult strategic decisions to further mitigate the impact to profitability from the lower fourth quarter revenue results. Operating loss for the fourth quarter was $1.3 million compared to operating income of $8.7 million last year, a decrease of $10 million. Net loss for the fourth quarter was $0.6 million compared to net income of $7.5 million last year, a decrease of $8.1 million. Adjusted net income for the fourth quarter was $1.9 million compared to $8.9 million last year, a decrease of $7 million. As a reminder, adjusted net income is defined as GAAP net income adjusted to exclude the effect of amortization restructuring charges and other certain items, including compensation expenses related to retention for those sales employees impacted by the LCDs and resulting income taxes on these items.
Adjusted EBITDA for the fourth quarter was $7.5 million or 7.5% of net revenue compared to $14.1 million or 12.2% of net revenue last year. We believe our proactive efforts to optimize our cost structure was a key contributor to our ability to deliver positive adjusted net income and adjusted EBITDA, both of which exceeded the low end of our guidance ranges in Q4. We have provided a full reconciliation of our adjusted net income and adjusted EBITDA results in our earnings release. Turning to a brief review of our financial results for the 12 months ended December 31, 2023. Net revenue was $433.1 million compared to $450.9 million for the year ended December 31, 2022, a decrease of $17.8 million or 4%, of which approximately 90% of the year-over-year decline occurred in the fourth quarter.
The decrease in net revenue was driven by a decrease of $16.7 million or 4% in net revenue of Advanced Wound Care products and a decrease of $1 million or 4% in net revenue of Surgical & Sports Medicine products. Adjusted EBITDA was $42.6 million or 9.8% of net revenue compared to adjusted EBITDA of $49.3 million or 10.9% of net revenue for the year ended December 31, 2022, a decrease of $6.7 million or 14%, all of which occurred in the fourth quarter. Turning to the balance sheet. As of December 31, 2023, the company had $104.3 million in cash, cash equivalents and restricted cash and $66.2 million in debt obligations compared to $103.3 million in cash, cash equivalents and restricted cash and $70.8 million in debt obligations as of December 31, 2022.
We also have up to $125 million of available borrowings on our revolving credit facility as of December 31, 2023. Turning to a review of our 2024 financial guidance which we introduced in our press release this afternoon. For the 12 months ending December 31, 2024, the company expects net revenue of between $445 million and $470 million, representing a year-over-year increase in the range of 3% to 9% as compared to net revenue of $433.1 million for the year ended December 31, 2023. The 2024 net revenue guidance range assumes net revenue from Advanced Wound Care products between $415 million and $435 million, representing a year-over-year increase in the range of 2% to 7%. And net revenue from Surgical & Sports Medicine products between $30 million and $35 million, representing a year-over-year increase in the range of 9% to 27%.
In terms of our profitability guidance for 2024, the company expects to generate GAAP net income loss in a range of $10.6 million of net loss to net income of $4.6 million. Adjusted net income loss in the range of $8.1 million adjusted net loss to adjusted net income of $7.1 million. We also expect EBITDA in the range of $5.8 million to $25 million and adjusted EBITDA in the range of $15.8 million and $35 million. In addition to our formal financial guidance for 2024, we're providing some considerations for modeling purposes. As a reminder, the first half of 2023 exceeded our expectations and the strong business momentum continued into the early part of the third quarter, ahead of the final LCD announcement in early August. As a result, our expectations for growth in 2024 are skewed towards the back half, given the 2023 comparable quarterly growth rates.
For modeling purposes, we expect first quarter revenue in the range of approximately $98 million to $104 million. Our profitability guidance in 2024 assumes gross margins of approximately 76% to 77%. GAAP operating expenses will increase approximately 10% to 12% year-over-year and total non-GAAP operating expenses will increase approximately 13% to 14% year-over-year. Our non-GAAP 2024 operating expenses exclude non-cash intangible amortization of approximately $3.4 million. Note that the expected increase in operating expenses this year is primarily related to incremental investments in clinical studies and regulatory-related spending in preparation for our renewed BLA efforts. Our full year 2024 operating expenses also reflect strategic investments to support key commercial initiatives.
Finally, our full year profitability guidance ranges also assumed total interest and other expenses of approximately $2 million to $3 million, GAAP tax rate range of negative 3% at the low end of the range to positive 52% at the high end of the range and we continue to assume a non-GAAP tax rate on adjustments of 27%. Non-cash depreciation of approximately $9.7 million, non-cash stock comp expense of approximately $10 million, CapEx of $23 million and a weighted average diluted share count of approximately $133 million. With that, I'll turn the call back over to Gary for some closing remarks.
Gary Gillheeney: Thank you, Dave. Before we open up the call to your questions, I wanted to share some additional thoughts on our outlook and underlying assumptions supporting our guidance for 2024. While the environment remains challenging, we're pleased to see the business trends show improvement in early 2024 and our commercial team continues to see progress in their efforts to reengage with our customers. We're encouraged by the evidence that our commercial support programs we implemented to enhance existing customer relationships and to regain lost accounts are proving effective and we are proud of the team's continued commitment to our mission. Our guidance reflects a return to revenue growth for 2024, fueled by new product launches across both Advanced Wound Care and surgical sports medicine markets, including contributions from a new license agreement with Vivex Biologics.
We view this license agreement as a great example of our effort to identify growth in margin accretive, high-return opportunities to leverage our valuable commercial infrastructure and leading market position in Advanced Wound Care. We are adding new products to our commercial team solution offerings which we expect will enhance our share of voice while providing value to customers by broadening our portfolio of differentiated treatment solutions. Our financial guidance also reflects our intention to continue to invest strategically in our business to support key long-term growth initiatives including our renewed clinical and regulatory strategy which we believe represents a significant value driver in the future. Importantly, despite our increased investments, we expect to deliver solid adjusted EBITDA and operating cash flow in 2024 which will help us continue to enhance our balance sheet and financial condition.
And we remain confident in the long-term opportunity for Organogenesis and we expect to remain a leader in the space with highly innovative efficacious products that deliver on our mission to provide integrated healing solutions that substantially improve outcomes while lowering the overall cost of care. And with that, I'll turn the call over to the operator to open the call up to your questions. Thank you.
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