Gary Gillheeney; President, Chief Executive Officer, Director; Organogenesis Holdings Inc
Please stand by.
Welcome, ladies and gentlemen to the fourth quarter and fiscal year 2024, earnings conference call for Organogenesis Holdings Inc. (Operator Instructions)
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 risk and uncertainties, that can 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 report and is subsequently filed quarterly reports.
You are cautioned not to place undue reliance upon any forward-looking statements, which may speak only as 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 coordinates with general accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these 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, Senior Organogenesis Holdings President, Chief Executive Officer, and Chair of the Board. Please go ahead, sir.
Thank you, operator, and welcome everyone to Organogenesis Holdings, fourth quarter, fiscal year 2024 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 an overview of our fourth quarter revenue results and provide an update on 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 quarter end, as well as our financial guidance for 2025, which we introduced in our press release this afternoon, and then we will open the call up for questions.
Beginning with the review of our revenue results for Q4, we delivered sales results above the high end of the guidance range outlined on our third quarter call, growing 27% in the period. Our fourth quarter results reflect strong momentum in underlying business trends and customer demand and excess of what our guidance had assumed.
As discussed in our recent investor calls, our fourth quarter in fiscal year 2024 guidance reflected the expectation that the final ruling from the MACs on the proposed LCDs would be announced in the fourth quarter with an effective date of January 1, 2025.
The LCD was finalized in the fourth quarter. However, the stated effective date of February 12, 2025, was later than we had assumed. We believe the stronger customer demand we experience in the second half of the fourth quarter is a direct result of less disruption in the marketplace related to the delayed effective date for the final LCD ruling from the MAC.
As mentioned on previous earnings calls, we applaud the MACs for continuing to prioritize coverage with demonstrated clinical efficacy for skin substitute products. We have been pushing for reform for many years and believe the LCDs represent a substantial first step forward to cleaning up the marketplace and providing access to all who need the care.
That said, we continue to believe the MACs evidence-based approach to coverage of skin substitute products should include both clinical and real-world data. Importantly, we continue to push for CMS to introduce the requisite changes to the payment policies for skin substitutes as well.
As discussed in our last earnings call, we have communicated to CMS that they should transition to a value-based payment methodology where skin substitute categories are paid on a fixed per square centimeter basis. This value-based payment methodology has the potential to substantially reduce Medicare Part B expenditures, improve patient access, enable physicians to prescribe treatment options based on the individual needs of the patient and provide the best outcomes for patients in the healthcare system.
As a leader in this market, we have been and will continue to actively engage with CMS to advocate for the requisite changes to the current system. We are proud of the team's strong execution in the fourth quarter. They reacted quickly to the news of the delayed effective date and focused on ensuring our customers were both informed and well positioned to continue to treat our patients with our full portfolio of highly innovative products.
We believe the better-than-expected revenue results we delivered in the fourth quarter, represent further evidence that Organogenesis is strong brand equity, established commercial infrastructure and deep customer relationships, taken together represent a substantial competitive advantage as we move through and navigate this uncertain market.
On January 24, 2025, the MACs announced the second delay in the implementation of the LCDs until April 13, 2025. The news of this decision created an additional ambiguity and disruption in customer behavior which has resulted in a more challenging operating environment to date in 2025.
They will discuss our guidance in more detail later on the call, but for now, I'll say that our team is focused on our targeted commercial strategy and are providing excellent service and support for our customers in this dynamic environment. We have introduced our financial guidance for 2025, assuming that the final LCD will be effective on April 13, 2025.
As discussed on prior calls, when coverage and reimbursement changes are implemented, the business experiences disruption and demand and utilization trends as customers transition to the new policies. Based on the April 13, 2025, effective date, we expect the environment to continue to be challenging throughout the first half of 2025, followed by an assumed stabilization in the market as such a significant improvement in our business trends beginning in the third quarter.
By way of reminder, the LCDs as finalized in November of 2024, only apply to DFU and VLU indications for skin substitute products. If the LCDs take effect as scheduled, a total of 18 products would remain covered, including our Apograph and Dermo graph products, for both DFU and VLU and our affinity [initial] products for DFU.
However, more than an estimated 200 products would be classified as non-covered. We continue to believe these material changes from the MACs and the coverage of skin substitutes represents an enormous opportunity for Organogenesis to serve more patients and importantly will be a positive for the long-term health of the wound care market.
Before turning the call over to Dave, I wanted to provide a brief update on a key area of strategic focus for the company. We believe gathering robust and comprehensive clinical and real-world outcomes data is essential, in developing a competitive product portfolio and driving further penetration in the markets where we compete.
We continue to invest in generating clinical data for our existing and pipeline products and believe such data and enhance sales efforts with physicians and reimbursement dynamics with payers over time. To that end, I'd like to share an update on our Renu program as well as key clinical milestones for 2025.
We completed the enrollment in our second Phase 3 prospective multi-centered double blinded randomized saline controlled clinical trial to evaluate the efficacy of Renu in patients with knee osteoarthritis in the second quarter of 2024.
The study enrolled 594 randomized subjects with KL severity of two to four knee osteoarthritis. We performed the pre-specified interim analysis on 50% of the planned 474 subjects, after 6 months of follow-up in the fourth quarter of 2024.
The Data Monitoring Committee or DMC recommended the clinical trial proceed without modification and without increase in sample size. The DMC also reviewed available safety data and found the safety data to be consistent with the known safety profile for Renu.
Regarding our next steps, we expect to have all patients completing the study by the end of the secod quarter of 2025. We expect to complete the initial statistical analysis and have top line data results from the second Phase 3 study to share publicly in September of 2025.
Our current timeline targets completion of the final clinical study report required for the BLA submission in the fourth quarter, which has us on track for a BLA submission by the end of 2025. And we continue to believe that if approved, introducing Renu to a large and growing pain management market represents a transformational opportunity for the company.
We believe Renu, if approved, will potentially address an unmet clinical need for all patients suffering from symptomatic knee OA, a degenerative joint disease that affects more than 30 million Americans. Today we have a clear roadmap and timeline for our Renu BLA submission. And if successful, Renu would be the only FDA approved biologic intra-articular injection to improve pain symptoms related to symptomatic knee osteoarthritis.
With that, let me turn the call over to Dave?
David Francisco
Thanks, Gary. I'll begin with a review of our fourth quarter financial results, and 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 $126.7 million, up 27%. As Gary mentioned, these results were ahead of the expectations we provided on our Q3 call, which called for a total fourth quarter revenue in the range of $100 million to $125 million.
Our Advanced Wound Care net revenue for the fourth quarter was $119 million, up 27%, and net revenue from Surgical & Sports medicine products for the fourth quarter was $8 million, up 24%. Gross profit for the fourth quarter was $96 million or 75.5% of net revenue, compared to 72.1% last year.
Operating expenses for the fourth quarter were $85.4 million, compared to $73.2 million last year, an increase of $12.2 million or 17%. This year over year change in operating expenses was driven by a $12.5 million or 20% increase in selling, general and administrative expenses, compared to the prior year period. Research and development expenses declined 3% year over year but increased 11% sequentially, due to the timing of expenses associated with clinical trials and research.
Operating income for the fourth quarter was $10.2 million compared to an operating loss of $1.3 million last year, an increase of $11.5 million. GAAP net income for the fourth quarter was $7.7 million compared to a net loss of $0.6 million last year, an increase of $8.3 million. And net income to common for the fourth quarter was $5.9 million, compared to a net loss of $0.6 million last year.
Net income to common includes the impact of both the cumulative dividend and the non-cash accretion to redemption value on our convertible preferred stock. Adjusted EBITDA for the fourth quarter was $18.2 million or 14.4% of net revenue, compared to $7.5 million or 7.5% of net revenue last year.
We're pleased with the financial results we delivered in the fourth quarter, where we leveraged the better-than-expected revenue results to drive adjusted EBITDA, that exceeded the high end of our guidance range by more than $2 million. Turning to a brief review of our financial results for the 12 months ended December 31, 2024, net revenue was $482 million, compared to $433.1 million for the year end of December 31, 2023, an increase of $48.9 million or 11%.
The increase in net revenue was driven by an increase of $48.1 million or 12% in the net revenue of Advanced Wound Care products, and an increase of $0.8 million or 3% in net revenue of Surgical & Sports medicine products. Adjusted EBITDA was $49.8 million or 10.3% of net revenue, compared to adjusted EBITDA of $42.6 million or 9.8% of net revenue for the year ended December 31, 2023.
Turning the balance sheet as of December 31, 2024, the company had $136.2 million in cash, cash equivalents and restricted cash, and no outstanding debt obligations. This compared to $104.3 million in cash, cash equivalents in restricted cash and $66.2 million in net debt obligations as of December 31, 2023.
As discussed in our third quarter call, the private placement of Series A convertible preferred stock to a Vista Healthcare Partners in November 2024, provided important capital to execute our long-term growth strategies and substantially enhanced our balance sheet and financial condition. We used a portion of the $122.7 million of net proceeds from this transaction, to pay off the outstanding borrowings of $66.6 million on our long-term debt facility. We appreciate the support from a leading healthcare investor and believe it reflects the Vista's confidence in the compelling opportunity investing in Organogenesis presents.
Turning now to a review of our 2025 financial guidance which we introduced in this afternoon's press release. For the 12 months ended December 31, 2025, the company expects net revenue between $480 million and $535 million, representing year over year change in the range of a roughly flat, to an increase of 11%.
The 2025 net revenue guidance range assumes net revenue from its Advanced Wound Care products between $450 million and $500 million, representing a year over year change in the range of a decline of 1% to an increase of 10%. Net revenue from Surgical & Sports medicine products of between $30 million and $35 million, representing a year over year increase of 6% to 23%.
With respect to our GAAP, profitability and EBITDA guidance for the company, the expects GAAP net income in a range of $9.5 million to $38.8 million. EBITDA in a range of $27 million to $66.6 million, non-GAAP adjusted net income in the range of $15.3 million to $44.6 million and adjusted EBITDA in the range of $43.6 million to $83.2 million.
In addition to our formal financial guidance for 2025, we're providing some considerations for modeling purposes. As Gary mentioned, we introduced our financial guidance for 2025 with the assumption that the final LCD will be effective on April 13, 2025. Given this implementation date delay, we expect the environment will be very challenging throughout the first half of 2025, followed by a significant improvement in our business trends beginning in the third quarter.
For modeling purposes, we expect the first quarter revenue in the range of $85 million to $95 million. And our profitability guidance for 2025 assumes gross margins in the range of 76% to 78%.
GAAP operating expenses will be down 2% to flat year over year and excluding non-cash intangible amortization of approximately $3.3 million and a non-recurring FDA payment related to our Renu BLA filing of $4.6 million. Our total non-GAAP operating expenses will increase approximately 3% to 6% year over year.
Note the expected increase in non-GAAP operating expenses this year is primarily related to incremental investments in clinical studies and regulatory-related spending in preparation for Renu BLA efforts, as well as strategic investments to support key commercial and organizational efficiency initiatives.
Finally, our full year profitability guidance range also assumes total interest in other income of approximately $4 million compared to expense of $1.5 million last year. A GAAP tax rate and non-GAAP tax rate of 26% and 27% respectively.
Non-cash depreciation of approximately $14.8 million, non-cash stock compensation expense of approximately $12 million, capital expenditures is approximately $45 million and a weighted average diluted share of approximately $134 million.
With that, I'll turn the call over to the operator to open your call to your questions.
Operator
Thank you. (Operator Instructions)
And our first question will come from the line of Brooks O'Neil of Lake Street Capital Markets. Your line is open.
Brooks O'Neil
Thank you very much. Good afternoon, you guys. I guess I, I'd like to start by just asking if you mentioned you expect the first half to be very competitive.
Could you just give us a feel for what you're seeing in the marketplace right now from competitors and maybe importantly also sort of the typical behavior you're seeing from doctors as it relates to, loading up inventory of your products or competitors' products etc.
David Francisco
Yeah, sure, Brooks, this is Dave. Thanks for the question. So, we're not really seeing a major change in the competitive environment. It's really more customer buying behavior. As you recall, we had anticipated that the LCD would be implemented on the January 1. And so, we expected some disruption in the fourth quarter.
When that didn't happen and got pushed to February and now actually pushed out to mid-April, we're seeing some kind of changing in buying behaviors with our customers when any kind of time that there's a reimbursement dynamic change, then customers pause oftentimes, test the reimbursement, need to get comfortable with it, and what we're seeing right now is exactly that. And as far as what you said about stalking and such, obviously some of our technologies, that are on the covered list are living technologies. So, with that short shelf life we don't have that option with customers.
Brooks O'Neil
Okay interesting and then I'm curious, you talked, or Gary talked a little bit about the process of moving forward with Renu and I'm just curious if you could update us on what you're currently thinking the timeline would look like after submission of your application and how quickly do you think you might hear back and be able to put the product on the market?
David Francisco
Sure, so we're expecting to file the BLA submission at the end of 2025. We would expect to hear from the FDA probably in Q4 of 2026, with expectation of getting approval at the end of '26, perhaps the beginning of '27. That's our current timeline, Brooks.
Brooks O'Neil
Okay great thank you very much.
David Francisco
You're welcome.
Operator
Thank you one moment for the next question.
And our next question will be coming from the line of Ross Osborne of Cantor Fitzgerald. Your line is open.
Ross Osborn
Hey guys, congrats on the strong quarter and thanks for taking our questions.
Maybe starting off on your salesforce, would be curious to hear, if you experienced any heightened levels of attrition or retention has been pretty good through the quarter and how that showed at year to date?
David Francisco
Yeah, actually we did see some attrition in the quarter, but it wasn't really that significant, Ross, and we've done a nice job of backfilling those heads and seeing some good talent out there. So, we feel good about where we are right now. And again, the team executed extraordinarily well in '24, so we're pleased.
Ross Osborn
Yeah, glad to hear it and then in terms of your products that were not on the covered list, any update on how those RCTs are going? With the RCTs
David Francisco
Could you repeat the question?
Ross Osborn
Yeah, just curious how your progress on your RCTs are going for the products not on the covered list?
David Francisco
Sure, so our Pure Apply study, which we started, we expect to have an interim analysis in Q4, and we expect to have a publication in Q1 of '26 for that study, with the expectation of having it ready and available for reconsideration by the MAcs by Q1 of '26, when we believe they'll be considering, assuming the LCD goes forward, reconsideration of products.
Ross Osborn
Okay, got it, thank you for taking our questions.
David Francisco
Sure.
Operator
Thank you. (Operator Instructions)
And our next question will be coming from the line of Ryan Zimmerman of BTIG. Your line is open.
Ryan Zimmerman
Oh, thank you. Good afternoon, everyone. Thanks for taking our questions. Congrats on the quarter.
Maybe just start, Gary, listening to one of your competitors last nights, they expect LCDs to go through as [written]. You've made the statement that, it's your prevailing assumption, your current operating assumption. I just want to be, I mean you have no reason to believe it would be changed at this point. I know this is your assumption but is there anything you can say from your perspective, having had those discussions.
Are you, you're operating under the view that nothing is changing as [written] right now?
Gary Gillheeney
That's correct. I mean, I think it's clear to CMS and the MACs that the costs are continuing to spiral and though the LCD is not perfect, we think it's a good step and it's a mechanism to gain some of the savings that they're looking to gain. So, we think from that perspective it's likely, more likely than not that it would go forward. I don't think it will be delayed.
That's not something that could happen. I mean, it's possible it could be rescinded because delaying it again would cause significant confusion in the market, and CMS is hearing how confusing the market is and patients are not being served appropriately with all of the confusion going on.
So, that's another reason to implement it in April. It's certainly another reason not to delay it, but, if for some reason they weren't happy with it, it would be rescinded, is probably a better answer, quite honestly, at this point in time and start again, but I think it'll be implemented.
Ryan Zimmerman
Okay very helpful and then you know as we think about it in the context of the guidance. I appreciate that you're giving a wider range on guidance for the year given some of the unknowns that are going to play out here in the first half of the year, but maybe Dave and Gary, you take us through kind of your assumptions on both the low end and the high end and and what I really want to kind of understand is what's convertible in your mind from a product standpoint? what's at risk from a product standpoint? as you try and move a product usage or or sales to the products that are on the covered list.
David Francisco
Yeah, sure. I think the idea there on the first half really is the fact that because it got delayed from February to mid-April was the kind of issue there, that just extends that confusion and ambiguity in the marketplace. So our expectation was, back when it was going to happen in the middle of February, that we would start to see some switching and transition in February. Now that's obviously pushed to the second quarter, so we've got a longer period of this uncertainty.
When we think about the back half though, back to your question about low end versus high end, the one question is how quickly do you convert those products in the back half of Q2, assuming goes into place in April 13, that's one component. How successful are we?
And then as you think about the back half and as we talked about the business trends changing once we get to the third quarter, as Gary mentioned in his prepared remarks, we're three products out of 18. So we see a major shift in the competitive dynamics in the back half and see a lot of opportunity for share gains amongst ourselves and other traditional players in the market. And us as a market leader, we think we'll take a proportionate share of that. So we see the back half being stronger than the first.
Gary Gillheeney
Okay, in addition, Ryan to converting our own products, obviously there's significant market share available as Dave mentioned. I mean this a very large component of the market, particularly just DFU and VLU is available. What we're also finding out is some customers are only using products that are on that approved list even for non-DFU and VLU, to avoid any potential confusion of using a product inappropriately and not getting reimbursed. So, we feel that the DFU, VLU open market is substantial, but there's also non-DFU and VLU that we're seeing now with covered products.
Ryan Zimmerman
And but just, maybe to follow up on this point, I think one of the big components of the Advanced Wound Care business is PuraPly, right? And as of today it's not on the list, but just to remind everyone, not necessarily all PuraPly usage is strictly relegated to DFU and VLU.
I guess what I'm trying to understand is, that entire business line isn't going away from April 13, and some of that is preserved outside of potentially, what's included in the LCD.
Gary Gillheeney
Well, that's completely accurate. Just as a benchmark, about 55% of the market is DFU, VLU. The rest of it is non-DFU, VLU. So, as a guide that's generally what we've seen in the space. I think our PuraPly product, relationship to non-DFU is a little higher. It's used a lot in dermatology and other wounds. So, PuraPly has a better ratio than that for us. So you're right, Ryan, there's a lot of revenue still available and including the surgical side
Ryan Zimmerman
Very helpful, Gary, yeah.
Operator
Thank you, and at this time I'm not showing any more questions in the queue.
And at this time we thank you for participating in today's conference call. You may all disconnect.
David Francisco
Thank you very much.
Gary Gillheeney
Thank you.
