Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter 2020 Earnings Conference Call for Organogenesis Holdings, Inc. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and that a 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 risk 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 reports..

Thank you, and welcome everyone to Organogenesis Holdings fourth quarter 2020 earnings conference call. I'm joined on the call today by Dave Francisco, our new Chief Financial Officer who was appointed to the role in February and joins us after a long career at Perkin Elmer.

So let me start with a brief agenda of what we'll cover today in our prepared remarks. I will start out with an overview of our revenue performance in the fourth quarter and in a review of the key drivers of the impressive growth that our team delivered despite the challenging operating environment.

I'll then share a brief review of our operating highlights in the fourth quarter and year-to-date periods. And after my remarks, Dave will provide you with a more in-depth review of our quarterly financial results and the formal guidance for 2021 that we included in our afternoon's press release. And then we'll open up for questions.

Let me begin with a brief review of our fourth quarter revenue performance. We reported total revenue growth of 43% year-over-year in the fourth quarter driven by 48% growth in sales of our advanced wound care products and 17% growth in the sale of our surgical and sports medicine products compared to the prior year.

Our revenue results were well above our guidance and exceeded the high end of our preliminary revenue range announced on January 13.

Our growth in Q4 reflected a continuation of the key drivers of our growth strategy and competitive advantages that we've talked about on each of our earnings calls over the last two years including the investments that we've made to expand our sales force in recent years, the benefits of our comprehensive portfolio of products that address patient needs to treat wounds across all the stages of the healing process, and the strong execution of our commercial strategy focused on leveraging our products in multiple channels, new product introductions and brand loyalty..

Thank you, 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 of 2020 was $106.8 million compared to $74.6 million last year, an increase of $32.2 million or 43%.

Revenue from Advanced Wound Care products for the fourth quarter of 2020 was $93.6 million compared to revenue of $63.4 million last year, an increase of $30.2 million or 48%.

Revenue from our sports and - Surgical & Sports Medicine products for the fourth quarter of 2020 was $13.2 million compared to $11.3 million last year, an increase of $1.9 million or 17%. Revenue from PuraPly products for the fourth quarter of 2020 was $45.3 million compared to $39.9 million last year, an increase of $5.4 million or 13%.

As of December 31, 2020, we had approximately 300 direct sales representatives compared to 265 at year-end 2019, and approximately 175 independent agencies compared to 160 at the end of 2019. Gross profit for the fourth quarter of 2020 was $81.3 million compared to $54.3 million last year, an increase of $27 million or 50%.

Gross margin for the fourth quarter of 2020 was 76% of revenue compared to 73% last year, an increase of 340 basis points year over year.

The increase in gross profit resulted primarily from increased sales volume due to strength in our Advanced Wound Care and Surgical & Sports Medicine products as well as a shift in product mix to our higher gross margin products.

Operating expenses for the fourth quarter of 2020 were $59.5 million compared to $56 million last year, an increase of $3.5 million or 6%.

The increase in operating expenses in the fourth quarter of 2020 was driven by a $2.7 million increase in research and development costs and a $0.8 million increase in general and administrative expenses compared to the prior year period.

The year-over-year increase in R&D expense was driven by an increase in process development costs associated with the new contract manufacturer, an increase in product costs associated with our pipeline products not yet commercialized and an increase in the clinical study and related costs necessary to seek regulatory approvals for certain of our products.

The year-over-year increase in selling, general and administrative expenses was driven by investments in additional head count, primarily in our direct sales force, and increased sales commissions due to increased sales as well as other selling costs, including credit card processing fees and royalties.

Additionally, our fourth-quarter operating expenses included $0.6 million of restructuring expenses, specifically employee retention and other benefit related costs related to the company's restructuring activities..

Thank you, sir. And our first question will come from Matt Miksic from Credit Suisse. Your line is now open..

Hey, guys good evening. Thanks so much for taking the questions. So much to focus on here to talk about that really, we're, seeing lot of - mostly good things happening that I'll focus in on just a couple. And congrats again on a really strong finish here and it's great to see things kind of working on moving in the right direction.

So, maybe if you could talk a little bit about. I appreciate the color on growth by sort of major businesses as you think about 2021. If you could maybe provide any similar color on runway for growth in the physician's office.

And what that looks like maybe in terms of round numbers or directionally a magnitude of growth and what some of - the other types of care channels look like just to give us a sense of how this all comes together to deliver this 15% to 20%.

And then I have one follow-up?.

Sure, thanks, Matt. Thanks for the question and appreciate your comments. So, we don't really provide direct guidance on sales channel.

Our stated goals for the office was to be at about 50% of our advanced wound care revenue and we're moving quite nicely towards that goal, but we do expect to see strong growth in the office in the second half of the year. We do see some demand starting to reemerge in the in the outpatient setting.

So that's also going to be helpful for us down the road where we'll have growth in HOPD and the office.

And what was interesting and exciting in our surgical sports medicine business unit in Q4 and even for the year, but mostly in Q4 is the additional sales in the - what we call the extremity areas which is more trauma, foot and ankle surgery where more of our regenerative medicine technologies can be sold in that channel quite frankly, even more so than the spine area, which we also have a significant part of our revenue in the Surgical & Sports Medicine.

So all of those areas right now are looking positive from a growth perspective, but the office will certainly be a strong component of our growth particularly with the acquisition of CPN, which entrenches us a little - more and gives us more access to more of those customers in that channel..

That's great, and I'm sure if other folks have to follow-up on those trends and topics you just mentioned. But I'd just ask one question if I could - around EBITDA. And you sort of delivered obviously a very strong top line growth in the back half and I'm sure that was a contributor to some of the very strong 23%, 24% second half EBITDA margins.

You've mentioned positive EBITDA in 2021, can you give us any other color as to how to think about that either front half back half or full year expectations?.

Yes, so we're not breaking it down by quarter, but I will say you're absolutely right. What we saw in the back half of the year was very, very strong growth 57% Q3 and 43% in the fourth quarter. So obviously that growth it generated a lot of flow through.

And so our expectation, we tried to give you some guidance on the key components that will go down to net income and EBITDA. And so, hopefully we have helped to build out your models. But we've wanted to be sure that you know there was some indication there. There is - it is a big step-up in growth investments for the year as well.

So, we are expecting to continue to invest in the commercial resources and have a big expectation around spend around clinical expenses as well. So, we think there's long-term opportunity for that 20% EBITDA, but I think we got there a little faster we anticipated just based on that growth in the back half..

If I could just ask, is that mean - as you see continued strong growth here on the front half maybe, is it right way to think about expenses catch up, investment maybe catches up to some of the momentum here in the front half? And then as you mentioned back half, you're facing tougher comps maybe not quite as much, obviously pop as we saw in the back half of next year.

Is that the right way to, think about sort of leverage and spend front and back half?.

Yes, again I mean I think we don't want to be providing quarterly guidance at this point. But I would say that your expectations around growth are correct given the comps that we saw in the back half of last year versus the comps from the first half..

Fair enough. Thank you, Dave. Thank you, Gary..

Thank you, Matt..

Thank you. Our next question comes from the line of Ryan Zimmerman from BTIG. Your line is now open..

Great, thank you. Good afternoon Gary. Good afternoon Dave. Thanks for taking the questions, really masterful performance in 2020 in spite of the environment. So, I guess the big question I think many are asking is around the guidance.

And I appreciate all the color you gave, but particularly around PuraPly guidance and the expectation for that to grow is kind of in the mid-single digit range in spite of what you did in the fourth quarter? I mean when we think about kind of the line extensions and what you could do maybe just get your thoughts Gary around kind of volume and unit growth this year in spite of the reimbursement changes that are taking place?.

Well, sure. So I think our Q4 performance which was really strong and obviously Q4 is our strongest quarter generally and PuraPly benefited from some of the disruption we had in our amnion manufacturing. So it's a tough comp. Going forward, we do expect unit growth for sure with PuraPly.

We have three months of headwind relating to going into the bundle for our larger pieces. So there is some ASP headwinds there. So we've got to overcome those headwinds, we'll do it with additional volumes. Well, we'll do it with our five new additional line extensions and new products.

So, the unit growth will help offset any sort of ASP decline that we would normally see coming off pass-through and still overcome. The fourth quarter of last year was very, very strong for us. So, that would be a comp in there as well that we have to overcome.

So we think collectively keeping PuraPly flat to slightly down is good performance, but we, its early days with the four products we launched in Q4. Right now they're trending nicely. If they continue to do well you know we'll be pretty confident in that guidance..

Okay.

And as far as the enforcement discretion, will we hear about that potentially before that would go into effect or help us understand maybe what the range of outcomes could be? I appreciate the conservatism to take it out of guidance for 2021, particularly in the back half, but maybe just the range of potential outcomes that we could see as a result of that?.

So number one we will not take the product off the market unless directed, so that's the first I think important thing. I think the FDA and no, I'm not an expert in the FDA, but the FDA cannot give you authority directly to keep selling as they're requiring all of these products to have a BLA license.

So they can't, I don't think there's a mechanism for them to actually say yes, you can stay on the market. They can certainly tell you, you have to come off the market, that's certainly an action that they can take. So, we think they're managing this through the enforcement and selective enforcement where they see risk.

So I don't think anybody is going to get a letter that says you can stay on the market, as I don't believe that authority exists with the FDA.

I think the likelihood is based on the risks of the product which is the safety profile of the product and where you are in the BLA process or IND process will dictate whether or not you'll fall under that enforcement arm. So unfortunately, there's not great clarity on yes you can stay on only yes you have to get off.

And then it's just managing and monitoring the enforcement activity..

Okay..

We have requested a meeting from the FDA to try to get more clarity and more understanding of how they're viewing our products and quite frankly, all products. And we haven't - we don't have confirmation on when that meeting is, it's a type C meeting I believe which requires them to meet with us within 75 days.

So, hopefully when we meet with them, we will get some more verbal clarity, but - we won't leave there with a letter that says you can stay on..

Okay got it, very helpful..

Hopefully that was clear..

No, very helpful. And then if I could squeeze one last in, on renew I understand appreciate the enforcement discretion impacts from that. But - bigger picture, where are we at in the process for renew - remind us kind of - where you are as it relates to a potential BLA.

And when do you think you could have that on the market more broadly with the proper reimbursement in place and potentially - can we hear some clinical data updates this year as well? Thank you..

Sure. So, we expect to complete the enrollment in the first half of 2022. We expect to complete the study in the first half of 2023 and then submit in 2023 our filing and then the FDA would have that probably for at least a year which takes you out to 2024.

And this obviously assumes that we're only having to do one trial if it deemed that we have to do a second trial that it could extend that time out nine to 12 months, but it implies a 2024 approval with a 12-month FDA review based on our schedule right now..

Got it. Thanks for taking the questions..

Sure Ryan. Thank you..

Thank you. Our next question comes from the line of Richard Newitter from SVB Leerink. Your line is now open..

Hi. Thanks for taking the question and congrats on the managing through the challenging year the way you guys did Gary, David..

Thank you..

So two from me one - the first one on the affinity and then a follow-up on ReNu starting with affinity Gary you've said in the past that the demand has outstripped your ability to supply that product.

Can you maybe just give us an update on where you are on capacity and manufacturing there? Are you able to satisfy all the demand that's in the marketplace as of this quarter or how should we would be thinking about that moving through the year?.

Sure. So the answer is we're not able to support all of the existing demand today. We did increase our capacity in Q4 last year. That capacity improvement didn't come until the end of December. We were hoping to get it earlier.

So we are enjoying that additional capacity in Q1 this year and whereas in the process of getting to the next level of capacity, we probably won't see that until April-May timeframe. So we'll start to see some improvement in capacity in the second quarter. Our goal is to get to 2.5 times the capacity we had in 2020.

We expect that to happen in the second half of the year. So we won't get there till the second half of the year. So that is our goal. We think at 2.5 times the capacity we'll start to make a strong dent in that demand. But as we continue to introduce the product around the country, we think that demand will continue to grow.

And we believe we need to get even above the 2.5 times going forward in 2022..

Got it.

And then on ReNu, I think you have said in the past that you're expecting, data readout for the 12-month Phase 2 trial one, is that still on track, how will we hear about that, will we hear about that in what form?.

That 200-patient study was published, if you're talking about the 200-patient study..

Yes..

Yes..

With the 12 months that going to - okay so that - what data are we expecting in 2021 from the Phase 2 or any additional data?.

Sure. So it just recently the 12-month data was published just recently. Obviously as you know the six-month data was already published. So the 12-month data was just recently published.

We expect by the end of this year to you know getting close to completing our interim analysis of 50% of the patients would probably have a readout of the of the Phase 3 trial the interim data in Q1 of next year. So those are the key dates at this point.

The publication of the 12-month study of the 200-patient study and then the readout of our six-month interim data or 50% interim data in Q1 of next year of our pivotal study..

Okay that's helpful. Thank you. And I'm just on review.

Can you help us size either way can you help us think through the way you're thinking about the market opportunity have once available you would potentially commercialize it? And what the target market would be and the opportunity there?.

So we see the market which is primarily hyaluronic acid today of being about a $2.4 billion market. So our 200-patient study that we've completed and as you just mentioned the 12-month data was just published was a three-arm study one comparing it to one of the market leaders and hyaluronic acid.

And obviously we demonstrated superiority at six and 12 months to one of the market leaders. So we think that with approval and with reimbursement that we would have a significant share of that market and would compete very well at some of the larger competitors in the space today in that hyaluronic acid space.

So large market large potential for the products if, approved and subsequently if reimbursed..

Got it thanks very helpful. Thank you..

Sure Rich. Thank you..

Our next question comes from line of Steven Lichtman from Oppenheimer & Company. Your line is now open..

Thank you. Hi, guys and congratulations. I want to ask on the amnion on business. The guidance for 2021 speaks for itself.

I'm wondering what you are seeing you know competitively you know how you're feeling relative to competitive efforts and are we seeing just also a significant expansion again in the overall use of amnions in the marketplace, given the strong guide that you talked about today?.

Well, we certainly see an expansion of amnion technology that continues to be the largest growth technology in the skin subspace and we even see that same growth in the auto biologic space in our surgical sports medicine business. So amnions are clearly expanding the market and growing.

Our product Affinity is the only living amnion in the space, so it's a bit unique. So from a competitor perspective, we don't see you know any product out there that's really challenging it from a technology perspective. And the efficacy that we're hearing from the field is very strong for the product as well. So we feel really good about that.

I think just generally you know you're seeing more activity from some of the competitive companies and I think that will continue to expand the amniotic space as well..

Got it.

And then just as a follow-up for the pipeline, apologies if I missed this, but on NovaCor can you talk a little bit more about expectations there and what that adds to your amnion portfolio?.

It's a significant product for us. We believe it will be a significant product for us. Its impact this year will not be material. We're expecting to launch that product at the very end of this year, so the revenue impact won't be till 2022.

And just to remind everyone that it's the same manufacturer that makes Affinity will make NovaCor that would be the most efficient way to make it because you're basically creating NovaCor's part of the process of processing the amnion.

But because we have capacity constraints with Affinity, we don't want to take any time or any capacity this year away from Affinity to create NovaCor. So we have that issue from a manufacturing perspective, but we do expect to launch it at the end of the year. And it is unique it will be the only living Chorion product.

And that's a product we might launch in multiple sites of care, which we think will also give it additional growth opportunities. In addition to the product itself has different properties which make it more useful in somewhat and some ways have greater utility for certain types of wounds..

Great, thanks Gary..

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..