Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2020 Earnings Conference Call for Organogenesis Holdings Inc. At this time, all participants have been placed on - are in a listen-only mode.

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 and quarterly report.

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 this 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..

Thank you, and welcome, everyone, to Organogenesis Holdings second quarter 2020 earnings conference call. I'm joined on the call today by Tim Cunningham, our Chief Financial Officer. Now let me start with a brief agenda of what we will cover during our prepared remarks.

I'll start with an overview of our revenue performance in the second quarter, including the improving business trends we experienced during the quarter and the areas of our business that have performed extremely well despite the challenging operating environment.

After my opening remarks, Tim will provide you with a more in-depth review of our quarterly financial results and the formal financial guidance we reinstituted in this afternoon's press release, as well as a summary of our balance sheet and financial condition. And then, we will open up the call for questions.

I'll begin with the review of our second quarter revenue performance. We reported total revenue growth of 6% year-over-year in the second quarter driven by 8% growth in sales in our Advanced Wound Care products, which offset a 5% decrease in sales of our Surgical & Sports Medicine products compared to the prior year.

Our revenue results were well above expectations and exceeded the high end of our preliminary revenue range that we announced on July 15. We believe our second quarter results were particularly impressive given the unprecedented level of uncertainty and business disruption caused by the global pandemic beginning in mid-March.

Simply stated, we believe our second quarter revenue performance is a direct result of the organization's resilience in the face of these unprecedented challenges and the dedication of our employees to our customers and patients.

Our growth in Q2 reflects a continuation of the key drivers of our growth, which we've talked about in each of our earnings call.

One, the investment that we've made to expand our sales force over the recent years, strong execution of our commercial strategy and the benefits of our comprehensive portfolio and solutions we offer in the Advanced Wound Care and Surgical & Sports Medicine markets.

After a difficult start to the second quarter in which year-over-year sales declined 29% for the month of April, we saw business trends begin to improve in May as many healthcare facilities began to reopen, reduced restrictions on access to their facilities and resumed patient consultations and treatments.

By the end of May, more than 80% of accounts that we service were open, compared to 70% at the end of April..

reduced travel and marketing programs amid COVID-19-related travel restrictions; a decrease in amortization associated with intangible assets; and a decrease in legal, consulting fees and other costs associated with the ongoing operations of our business.

These decreases in SG&A expenses were offset partially by an increase in expenses due to additional headcount, primarily in our direct sales force..

Thank you. And our first question will come from Matt Miksic. Sir, your line is now open..

Great. Thanks so much for taking our questions, and congrats on what was a pretty strong quarter in a pretty tough environment. In fact, I'm looking at the growth rate, and if I'm not mistaken, it might be the best top-line growth rate in our universe this quarter.

So I know 6% wasn't where you started out aiming at for the year, but congrats on a pretty - for handling Q2 pretty well..

Thank you, Matt..

You bet. So a lot to follow up on, but I wanted to focus on a couple things. One was the sort of the strength in amnion and what you can say maybe about your supply levels, the trajectory of that growth in the quarter and maybe how it differed across sites of care.

And I don't want to stress this too much, but there's competitive landscape, if it's changing, if you anticipate it changing. One of your old friends is getting refunded and recapitalized and expect, I guess, to be back out in the market and how we should think about that. And then, I have one follow-up..

Sure. Regarding our amnions, I think what's important is we relaunched Affinity, which certainly had a significant impact on the quarter, the product selling extremely well, and also our strategy of diversifying our sites of care and our offerings in those sites of care.

So as we focused on the office, that allowed us to continue to sell not only just our amnions, but also our other products that are designed for that site of care. So we're pretty excited about how our amnions are performing, excited about the relaunch of Affinity. And yes, we have a new manufacturer.

So our supply of Affinity is much stronger than it ever was, and we're continuing to build that capacity as we go forward as the demand continues to increase. So sites of care were important for Affinity, as well as, obviously, the other products that we have and the supply that we have.

On the competitive landscape, we really haven't seen much of a change yet, though other competitors are certainly stepping back in. Affinity is the only fresh amniotic product in the space. We're pretty excited about that. PuraPly is still a very strong product, particularly in the office, in outpatient setting.

So we're pretty excited and pretty confident that our portfolio will withstand anything that we see in the competitive environment today. The other thing that's interesting is we still have access - we only have access to 65% of the wound care centers, but we virtually have been connected to about 100% of our customers.

So, we've continued to build our brand and our relationships during this difficult time, and we think that will pay dividends for us down the road as well..

Great, that's helpful color. And then, just on PuraPly, I'm sure you'll get some other questions on this.

But given that you're looking at the down 45% to 50% in Q4 and down 14% for the year, how - I know you started the year with a strategy in mind to expand the number of SKUs under that brand and sort of buffer that business a little bit from the kinds of sharp declines that might be implied by the expiration of the pass-through reimbursement.

I guess what have you learned so far? Maybe how has your thinking changed, if at all? And maybe, what kind of assumptions are baked into that down 14% at this point?.

Sure, I'll start. And Tim, if you want to jump in, that's fine. So we have launched additional SKUs. We have expanded the PuraPly offering and the number of accounts in the office that are utilizing PuraPly. So that will have a significant impact in holding the brand and holding the product.

We've also launched our XT line extension of PuraPly, which is selling very well. We just recently launched that and expect that product to continue to grow to help offset any decline in PuraPly sales.

Tim, I don't know if you have anything to add?.

No. I think the only thing I would add to that, Matt, is that we started the year with PuraPly being down 40% to 45%. So I think it really hasn't evolved or changed. We're pleased with the line extensions and XT, as Gary mentioned. But the majority of the decline is really just due to the effect of COVID..

Okay. All right. That's helpful. And I guess just to clarify, Gary, your comment on XT, recently launched.

Is that effect, I guess, on the potential growth or decline in PuraPly still sort of uncertain? Or what are your assumptions in terms of the success of that product?.

Right now, we're very confident in the product. It's selling extremely well. We thoughtfully launched it in only certain regions of the country, and it's performing above our expectations at this point.

So we think it will be a strong contributor to help offset any ASP impact on the larger sizes that we have that are impacted by pass-through; so we're very confident. As Tim mentioned, Q4 is impacted not just by the ASP, but the impact of COVID and rebounding from that.

But we think XT will be a strong contributor to the growth of PuraPly post pass-through..

Excellent. Very helpful. I'll hop back in queue. Thanks so much..

Thank you..

Thank you. Now our next question is from the line of Ryan Zimmerman. Sir, your line is now open..

Thank you. And let me echo Matt's sentiments, really a strong performance in light of everything. So maybe just to begin, Gary and Tim. I was just curious.

With everything that happened in the second quarter and how clinics reopened, I was just wondering how much impact, maybe either backlog or a surge, occurred in June and kind of how you're thinking about that, if at all, into the third quarter? And then, I have a follow-up..

We really didn't see a big impact of backlog in June at all, certainly not in Advanced Wound Care and not as - a little bit more maybe in the Surgical & Sports Medicine area. But on the Surgical & Sports Medicine side, 75% of our business is in sort of the nonmetropolitan area. So they did fairly well once we got through May.

They rebounded extremely well in June. So, there was some backlog there but we don't have a lot of backlog built into our Q3 or Q4..

Got it. That's helpful, Gary. And then the rep hiring did continue to increase, but at the same time, productivity levels improved sequentially, which is quite impressive given what other peers have seen in this quarter.

So can you just talk to us about your longer-term views on what the appropriate rep levels are, maybe some thoughts around productivity and kind of where you think you can take that just to kind of help us frame out continued expansion of your sales force?.

Well, certainly an area - it's an area we focus a lot of attention on, and it speaks to our portfolio as we get deeper, and you've heard me say this on other calls, we continue to get deeper and deeper into our accounts as we utilize our portfolio with new additions, such as Affinity, which is a re-addition, and PuraPly XT, which is a new addition.

We expect that to continue to grow. And our expectations for reps, we'd like to get to 300 to 315 or 310 probably at the end of the year. We'd like to see our agencies go up to around 170 to 180. And we expect productivity improvements in each of those areas, both the agencies and our direct reps, each year as we launch new products.

So it's important when you - for us that we strategically put product offerings in different sites of care, one, to maximize the potential of the product, but also not to cannibalize other products. So, we're continuing to improve the productivity of our sales reps. So we - our guide has always been $1 million per rep.

We exceed that, and we will continue to exceed that, but our goal is to improve that every year..

That's very helpful. And then just the last one for me and I'll hop back in queue.

With the dynamic that's occurring in the fourth quarter with PuraPly, I wonder if you could maybe talk to us about your underlying assumptions for unit growth in spite of the changes to reimbursement for PuraPly and how that may play out or kind of what you're hoping for into next year from an underlying basis.

Thanks for taking my question, and again, very strong performance..

Great. Sure, thank you. We certainly expect units to grow next year for PuraPly in Q4, and I'll defer to Tim. We expect there to be a slight decline. That's typically what we experience. So pass-through only affects our larger-sized products, which for us is two.

So those sales will decline, and we will eventually see the units increase as those larger wounds revert to some of the product offerings that we'll add to the bundle that can handle those wounds. And because of our office strategy, there are solutions in the office for those larger wounds, but it will take a little time.

It's usually a quarter and a half where we start to see the units to grow beyond the previous year.

So there'll be a quarter, quarter and a half decline in units, but then you'll see growth in the office and you'll see more in the HOPD, which is the outpatient setting, as those larger wounds utilize some of our new offerings that we'll be putting out in October..

Thank you..

Thank you. Our next question is coming from the line of Richard Newitter. Sir, your line is now open..

Hi. Thanks, guys, and congrats on delivering growth and expecting growth and actually providing an outlook. You certainly will stand out this quarter. A couple questions here just on Affinity and the amnion portfolio broadly, too, if you can comment on that.

What surprised you most, I would say, in the quarter, if anything? And with respect to Affinity accounts and utilization relative to maybe what your expectations would have been for the relaunch of this, who's using it and where and is this existing customers? Or what's the mix of the customer base for that product in particular?.

Sure. It's primarily in the office right now. So we've strategically launched it in certain areas of the country in the office only, and we have historical users of the product. As you know, the product was sold in 2018, but we've been able to add additional customers at a very rapid rate. So, the product is selling extremely well.

It's exceeded our expectations at this point in time, and we'll continue to expand the office offering as capacity expands..

Great. And I'm just curious, beyond Affinity, anything else in the portfolio that surprised you positively or negatively, in particular, during the quarter? And then I have one follow-up..

Well, what was interesting is what we call our PMA and other products like Apligraf and Dermagraft, which are the gold standard in wound care in our opinion. And certainly, the anchors of our wound care - Advanced Wound Care market grew extremely well. In fact, was some of our higher growers.

And what we learned is what we believe is the brand equity of those products, and particularly in a time of crisis, going back to something that you know it works, you know it's going to be reimbursed, it's covered by 1,500 private payers, it just was a migration back to those products immediately, that was a bit of a surprise.

Our strategy of moving more into the office, we weren't surprised that wounds and other procedures moved to the office when hospitals and outpatient centers were closed, but the pace in which they moved was a bit surprising to our advantage. So fortunately, our strategy paid dividends for us, and COVID actually helped drive that strategy.

So I think those are the two surprising things. The launching of two products, we launched PuraPly XT and Affinity in the midst of a crisis and both have exceeded our expectations. Affinity is already beyond the run rate that we exited in 2018 in a very short period of time.

So I think those things, the brands - the strong brands, our PMA products did extremely well, the office space business grew even faster than we thought and launching two new products in the middle of all of this went very well..

Great. And if you would, I appreciate that you have different mix between metropolis-based accounts and maybe kind of more rural accounts.

But in areas that are seeing surges or resurgences of the virus, I'm just curious if you can comment on any trends or potentially signs of retreat or if not, that would be helpful just given that there's different trends that are starting to emerge across the country. Thanks..

Sure. Well, we're definitely seeing trends - negative trends in the Texas area, Arizona, as well as in the Miami area. So we're seeing some of those trends. Fortunately, again, we're not in the metropolitan areas like Miami or some Houston, Dallas areas. But we are starting to feel a little bit of it in those markets.

We're seeing a little bit of a slowdown. So we've been - it's one of the reasons we're a little cautious in our guidance in the Surgical & Sports Medicine business for the second half of the year. But most of the business that we have, as I said, is in the non-metropolitan area.

So, we don't expect to see a significant decline if there is a large rebound..

Thank you..

Thank you. And our next question is from the line of Steven Lichtman. Your line is now open..

Thank you. Hi, guys, and congratulations on the quarter. Just wanted to follow up on the last - prior question around backlog. The May, June growth was very impressive. You mentioned, Gary, that you didn't see the growth being driven by backlog.

Looking forward, do you see deferred procedures, say, from that late March and April time frame, therefore being an incremental tailwind still to come and potential upside driver?.

We do more on the Surgical & Sports Medicine side, but we do see that as a potential tailwind for us in the end of Q3 and more so in Q4. We don't see a lot of backlog in the Advanced Wound Care side because many of those wounds, I think, moved to the office because we're seeing a significant growth in the office.

We are clearly taking share in the office, but I believe a lot of those wounds are wounds that would have been treated in an Advanced Wound Care outpatient center are being treated in the office. So I think we've absorbed some of that. There should be some, but not significant on the Advanced Wound Care side, in my opinion..

Great. Thanks, Gary. And then just secondly, on the pipeline. We're getting a little closer, I think, to the TransCyte launch. I think you talked in the medium term here.

How should we be thinking about your preparations for launch there? And what kind of work needs to get done? And then also just wanted to ask you with respect to ReNu, whether that trial has restarted as well..

Yes. So regarding TransCyte, which we're looking to launch at the end of 2021 at this point, so our preparation is we need to build a direct sales force. That will be in the process of starting.

We think it's a very concentrated market, one that we think we can serve with a small group of sales folks, 28 - I think 128 centers that we'd be calling on, control about 40% of the market. So that's important, so that's part of the strategy.

We're also still working on TransCyte to get the manufacturing process, which as you know, we were reengineering that process to keep the capacity where it needs to be to meet demand, but also to keep the margins where they need to be; so that work is still going on.

So building the sales force and continuing to make sure the manufacturing process is robust is what our focus is. Regarding ReNu, ReNu-- most of the clinical work for ReNu is on hold right now partly because of spending holds that we put on the product - on the project because of COVID.

We now expect to ramp that back up at the end - during Q3 and expect to start that trial in Q4 of this year, Q1 of next year. COVID has had an impact generally on all of our clinical work in some way, shape or form, but we expect Q4 or Q1 that the ReNu trial will begin..

Understood. Thanks, Gary. Appreciate it..

Sure..

Thank you. We are currently showing no remaining questions in the queue at this time. That does conclude our conference for today. Thank you for your participation..

Thank you..

Thank you..