All right, welcome everyone to the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analysts here. It's my pleasure to host this session with Organogenesis. I'm delighted to have Gary Gillheeney, the CEO and Chairman, and David Francisco, the CFO. Before we jump into it, just a brief disclaimer. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. With that out of the way, reimbursement is really kind of the first topic, coverage and reimbursement is kind of the first topic that I wanted to cover today.
If we kind of circle back or think back to last year, the elephant in the room was the CMS proposed rule for the physician office, and now it's really kind of the recent LCD from three MACs, which kind of is complicating the wound care industry and potentially some of your operations. But, Gary, first, maybe just talk about what happened. Give investors kind of the cliff notes of the proposal or the final rule and maybe the potential impact for the company.
Sure. So on August 3rd, three MACs issued an LCD, Novitas, First Coast, and CGS, and they issued a policy regarding the use of skin substitutes for venous leg ulcers and diabetic foot ulcers that will go into effect, if unchanged, on September seventeenth of this year. There was about 190 products that were affected by that policy change. 130 of them were identified as non-covered, and five of our products were part of the non-covered list. So it appears that CMS, or the local MACs, concluded that our products don't meet their definition of what a skin substitute is, which we clearly do.
Their definition is basically a scaffold matrix that's applied and not replaced, that allows for cell migration, which stimulates healing for wounds, and clearly, our products, you know, meet those definitions and those qualifications.
Got it. And with the final rule taking effect September seventeenth, we're clearly a few days away from there. I think that on the call, you laid out the potential financial impact, and I think generally consensus numbers have taken that into account for 2023 and for 2024. But maybe just help us better understand what efforts the company is making, the industry is making, to combat or push back against the LCD change.
Certainly, most of the industry is pushing back, particularly the clinical community, and we have an internal and external team of experts that are working on this issue literally day and night. So we've provided the MACs with a full dossier of our products, both the regulatory, clinical characterizations and clinical efficacy data for each of our products. That clearly demonstrates that the products do meet the qualifications and the definition. We've also met with all three MACs. We've met with the Office of General Counsel at HHS that also described the reasons why our product meet the qualifications and also some of the procedural issues that we see with the ruling.
We have an upcoming meeting with CMS, where we'll also identify some of the inconsistencies and procedural challenges, and we'll ask CMS to intervene with the local MACs and try to get this, these policies either rescinded or amended, so they appropriately affect patient care appropriately.
And when is the upcoming meeting? And, just to pile onto that question, I mean, the impact, I think, is again, fully out of numbers, but do you have any ballpark scenarios or probabilities in mind of whether or not you think it's going to happen, and you're going to just have to push back with resolution over time?
Or do you think there's a non-zero chance that they could really step back from the September 15th decision?
Well, we think because of all of the information that we've provided and the pushback from the entire clinical industry, as well as support groups, legislation, legislators as well, that we think that there'll be some resolution before the seventeenth. We're not sure what that resolution will be, but our thinking is that our meetings will all be, you know, we'll have all our meetings before the seventeenth. We have one left, and we'll get some resolution by the seventeenth.
Okay, and that or resolution could include, like, a delay in implementation until-
Yeah
... X date?
It could be rescinded, it could be a delay, it could be moving products from the non-covered to the covered list, once they've provided the information like we have, that our products clearly qualify and justify being on the covered list.
Okay. One of the things that's kind of struck me when I speak to wound care clinicians is just how much uncertainty in reimbursement or coverage changes can change physician practices. And with the LCD being out there for a month, are you seeing any meaningful changes in third quarter to physician buying patterns or purchasing patterns into the seventeenth? And maybe for Dave, I mean-
Yeah.
We got consensus at 105, down 4% year-over-year. Is Ryan and myself in the right position for how you're thinking about this?
Well, I'll say this. Certainly we're seeing some clinicians hesitant to start a new patient on a healing algorithm, just in the case that those last applications are going to be beyond the seventeenth. So it's affected us a little bit earlier than we had anticipated, but not materially different than what we talked about on the earnings call. As far as guidance is concerned, you know, it was a difficult decision for us to withdraw guidance, but we don't have any guidance out there for Q3 or the back half. And so given the level of uncertainty right now, we're not able to comment on it at this point, but-
You brought up kind of the application aspect of the LCD. I think it's going back to, like, four applications, if I remember correctly. It's part of the resolution if they were even to keep 12, and is that kind of another avenue of upside for you?
It is, and it's clearly problematic. Moving from, you know, 10 to 12, 10 or 12 to 4, depending upon the MAC, is extremely problematic. What it really does is it doesn't allow for the treatment of larger wounds, which are the more complex, usually the sicker patients. So what appears the MACs looked at, they referenced the study, which is a very good study by Dr. Armstrong, and in that study, they indicated that the average number of applications for a wound is four. So that's the mean. The problem when you utilize a mean is it doesn't consider the standard deviation, which are, in this case, was about 4 as well.
So considering the standard deviation, the number of applications at a minimum should be eight, and if you don't have that opportunity, the larger wounds, you know, the more sicker patients are not gonna get treated. And a lot of the package inserts require more than four applications. So it's, you know, it's equivalent that if your physician gave you, you know, antibiotics for 10 days, but you were only able to use them for four days, you know, you're not gonna get the result, the patient won't get treated, and you're basically, you know, costing the system money because it is not a wise use of funds. So, the other challenge with the study, though, again, it was a very good study, is it was in the outpatient setting, in the HOPD model, which is a bundled model.
In that site of care is, is where you get smaller wounds treated because of that bundle system. This, you know, the LCDs also cover the office, and the office is where larger wounds are treated. So, you know, the study in that site of care is for only smaller wounds. Using the mean for smaller wounds as well is really, you know, gonna have an impact on patient care. So that is a, you know, a real challenge, I think, for clinicians to be able to work within that. But we think that will continue to get challenged. Yes, it is more of an opportunity if more applications are able to be used for sure.
When you think about the potential shift in change or shift in clinical change, this could potentially push patient care back to the hospital, which is a more expensive site of care to begin with. I know that you've talked broadly about your strategy being focused on the physician office, and that's where you have thought the growth opportunity would be. But I know it's early. How is kind of the LCD maybe altering your strategy or your thoughts looking ahead of the physician office versus hospital? I know you don't have resolution yet, but any kind of early thoughts on the playbook going forward?
Well, I think you're correct. I think it has the potential of pushing more patients into the hospital, which, you know, is not what you want to see. It's more expensive, but there's also still capacity issues in the hospital, and, you know, hospitals don't want more patients in there in the ER with troubling wounds. So we still think that, you know, the office is a great opportunity. We still see that a lot of patients will be treated in the office. We think as CMS moves to what we believe will be ASP or most likely a bundling system, I think, you know, patients will be able to be treated in that site of care. Certainly, the larger wounds, better than they would be in the hospital setting. So still a great opportunity. It's 15,000 offices.
It's 1,500, you know, wound care centers, so there's still a, a real growth engine for the company. And once the market starts to settle down, when these reimbursement changes are finalized, like a bundle in the office, we just think that, you know, treatments will start to move back into that office.
Got it. Maybe Dave, for you, as much as you want to comment on financial impacts for 2023 and 2024, I'll still ask the question. But you laid out on the call kind of a range of potential headwinds for 2023, for the back half here and going into 2024. As you've dug into the numbers more and looked at the potential headwinds, has anything changed on that map of how you're thinking about even next year?
Yeah, not materially, Drew. I mean, what we showed there was what we had in the first six months. I think we talked a little bit about the seasonality between the first half and the second half, but it's in that range, and so, you know, nothing materially has changed from our views from the earnings call.
Okay. Maybe just to shift gears to some of the growth drivers, looking ahead, but, Gary, you're talking about, CMS potentially moving towards a bundled payment, at least keeping ASP, for the time being. On some of the calls, you've talked about competitive headwinds in the physician office space, and putting aside the LCD, it really sounded like the competitive situation is getting better as we progress through the year. So maybe just on that front, I mean, what are kind of your current thoughts on the competitive landscape in the physician office? And there was talk about, loss of market share, but any way you can size that opportunity and what it means for, recovery?
... So we certainly see a move to ASP plus six, though slowly, which is helping. I think there's about 65 products now on the published list. I think there were about 16 or 18 or so by the end of last year. So not at the pace we'd like, but clearly starting to see the movement there. Where even with this recent LCD change, there are some products that are no longer, you know, available in the office. We think even with some changes in that LCD, there'll still be a number of products that are not going to be covered, that don't meet the criteria. So, you know, that just means more opportunity, you know, for companies like us with a broad portfolio, a very large footprint in the office, to take share.
We think there's 15%+ of market share available as a result of some of these changes. When you go to full bundling, we think that, you know, that opportunity is closer to 20, 20%.
Got it. And is your, as you're speaking to clinicians, reimbursements, folks, CMS, I mean, are you hearing in the tea leaves that the plan is to move to a bundling system, and that's what we should kind of expect for the 2024 proposed rule in July?
Oh, I think the answer is yes. I think it would have to be a bit of a phased approach.
So you may not see full bundling until perhaps 2026, but it's pretty clear that CMS wants to bundle in the office. They like bundling. That's kind of, you know, the direction they'd like to go. I think what they're struggling with is the number of products that are in the office, the sizing of the wounds, as I've mentioned a number of times, very different than an HOPD. So, you know, they've got to wrestle with those issues and where, you know, we've provided a lot of input on what we think the right bundling methodology would be. So you're not pushing folks back in the office, and you're not eliminating, you know, the larger wounds and some of the folks that really need the products that we sell and other companies sell to, you know, solve their wound problems.
Maybe just to shift to sports medicine, surgical and sports medicine, the company has been in rebuild mode, with the franchise shifting specialties and into new procedure categories. So where is the company today in terms of that rebuild phase? What inning are we in? And really, how are you thinking about the playbook for investing in the segment, into the business, maybe ahead of ReNu?
We're still excited about our surgical and sports medicine business unit. It exceeded expectations in Q2 again. You know, we're in year two of the rebuild. We've just hired a new head of our surgical sports medicine business, who has a lot of experience in the space. We're aggressively attacking opportunities now that we have that infrastructure and that leadership. You know, we see the playbook in that space ahead of ReNu. You really need to have contracts to be successful. In the biologic space, you know, you need larger products, which can be a challenge. Fortunately, we have the ability to create those larger products. You also need products that persist more with, you know, greater tensile strength in the OR, and they need to be shelf stable.
You know, they need to be on the shelf, particularly as it relates to trauma and some other soft tissue, as we're pivoting from a fusion kind of sports medicine, more orthopedic to soft tissue. So as you move into that soft tissue market, you just need to have the products with the size, the tensile strength, the persistence and shelf stable. And you need to attack it both with direct and agency kind of distributor relationships. You know, the directs to build brand equity training, how to use the biologics, and you really need the agencies to cover the market and make sure product is on the shelf, and you have, you know, enough coverage, you know, quickly to be able to attack the market.
So we think that's the playbook, that's the direction we're heading, and the business unit continues to perform well.
Have you talked about on the, like, what percentage of the direct sales force is actually, really covering the surgical sports medicine business at this point?
It's not large today. It's about 30.
Okay.
So we see that probably doubling. And our agency business right now is about 75-80 agencies. Each agency is 2-3 ft on the ground. We'd like to see that double. So we're building both the direct and the agency side of the business.
And that doubling, is that over the next couple of years?
Yeah, 18 months.
18 months.
Yeah.
Okay. And if you back to Dave, another financial question for you, but before the LCD, you did plan to reaffirm your prior guidance, and essentially, consensus has kind of left the sports and surgical numbers the same. I mean, it shouldn't be impacted by the LCD, but it doesn't necessarily sound like anything has changed in the way you're thinking about the surgical and sports med medicine outlook, per se. So what gave you kind of that initial confidence in a back half acceleration before the full guidance was pulled?
Yeah, sure. As you said, we didn't change the guidance at all for SSM, and the LCDs don't change that at all. So, you know, our view is that it's, as Gary mentioned, the business performed very well in the first half.
...We're excited about that continued build-out. We're excited about the new head of the commercial resources there, and, you know, we think there's some great opportunity ahead of us. I think in the back half, as Gary mentioned, some of the things that are key for that marketplace are really, you know, connected to our PuraPly franchise. And so we see that, you know, continuing to accelerate growth into the back half.
Okay.
We do expect to launch two new products next year, in the first half of the year, which we think will be very impactful.
Can you, this is gonna be a question downstream, but while we're on it, can you talk more about what kind of these two new products are, line extensions or or something more revolutionary in the portfolio?
I can talk a little bit about it. I don't want to talk too much about it, but it speaks to the size and the thickness and tensile strength, you know, that, that we believe is critical, and the additional PHMB, or the additional antimicrobial capabilities when you have thicker, larger pieces, so you get the persistence of, of that antimicrobial impact, which is important for particularly soft tissue surgical wounds as it relates to SSI, surgical site infections. So we think those products are addressing that, that size and, and thickness and additional antimicrobial capabilities that really no other product has, but a PuraPly brand.
Got it. Yeah, that was gonna be the follow-up, but it's built around your, your-
It is.
Okay, got it. Maybe just on the commercial infrastructure, I think you ended the second quarter with 365 reps. So it's down a bit off your high, about 15%. But I think one thing that's kind of struck me as I'm looking at numbers is, like, despite a reduction, I mean, you're actually seeing your productivity kind of remain steady at $1.2 million-$1.3 million. So how are you thinking about your rep productivity, I mean, looking ahead? I mean, we generally see implant device companies do $1.5 million-$2 million, sometimes $2.5 million, but how are you kind of thinking about productivity levels and where you could actually see a peak in your direct sales force?
Yeah, we did drop down some earlier this year, and you can see again, the productivity levels are holding. As far as, you know, that distribution of productivity, you know, it depends on the region, the rep, the, you know, product portfolio, and those types of things that are selling in those different areas. But, so that's obviously the average, but we see a lot of opportunity to continue to improve productivity going forward, you know, just given all of the, you know, the direction of the company, as Gary mentioned in SSM, and, you know, continue to reconsolidate share and such as, as he mentioned also earlier. So we see some real opportunity there.
Is it more just filling out the bag and giving them, maybe having, more wallet, more procedure wallet share? Just anything on what's really gonna drive the underlying productivity.
Yeah, I mean, I think it is, you know, additional things in the bag. As Gary mentioned, a couple new products coming out next year. Obviously, those will be in the surgical setting, but, we're also building up that direct team, but also, you know, again, that reconsolidation of share in the wound care space, you know, could be a big play, player driver in that, area as well. But it is getting deeper into the wallet, so the reduction that we did, earlier was to actually improve performance. So we want to go deeper. You know, so we, we actually measure rep productivity all, you know, all the way down to contribution margin per rep.
So if we're not seeing what we want, we're gonna intervene, we're gonna look at the territory, realign territories, could be training, could be getting deeper into the accounts, could be replacing, you know, the representative, if that's the case. But we constantly try to get deeper and deeper into the account because we have such a large portfolio. And to your point, when we add more products, we continue to get deeper, that productivity goes up. And we want to see the productivity go up before we expand.
Get that bit of the margin that you're always asking about.
With going deeper at the account level, I mean, is it just really kind of finding that key opinion leader or champion at the accounts, and then disseminating that down to other clinicians at your account? Or just any views on how, what the strategy is in terms of actually really going deeper or what you typically see?
Well, we have such a large share of voice because of the size of our footprint in wound care, probably the largest sales force in our space, and we have great relationships. You know, fortunately for us, our turnover in our sales organization is below the industry average, so we have long-tenured relationships with clinicians. We do have strong KOL opinion leader support as well. But our reps spend a lot of time in the clinic because of our portfolio, the larger share of voice we have, the more opportunity we have to go deeper into the account and to help, you know, keep competition out.
So it really is the relationship and the share of voice, the time that we require our reps to spend in an account versus continually, you know, moving to other accounts.
Got it. And then just on the, the sales force expansion, which, has been a growth driver aside from productivity gains, you're at 365 now, 30 of those reps are more surgical sports med focused. I mean, how are you thinking about maybe the core, wound care rep expansion looking ahead?
Go ahead, do you want? No, you want to. I was just gonna say, just given the circumstances right now, we're just on a pause, you know, mode here. But, you know, clearly there's a tremendous amount of incremental opportunity to expand the market, and the best way to do that is through incremental awareness about the advanced modalities that we have. And so the larger sales force you've got, the better off you're going to be from an expansion standpoint. The issue is right now, just given the uncertainty, we're slow and being selective about that, any kind of expansion at this point.
Got it. Gary, you touched on pipeline a bit with the two new line extensions for PuraPly in 2024. I'll call them line extensions. It sounds like it could be a little bit more than that. But maybe just talk about Renew. I mean, that seems to be one of the other key pipeline products looking ahead. Maybe where are we in the FDA conversations and potentially seeking a second trial or being able to skip that?
Sure. So we are extremely excited about Renew. If successful, will be transformational for the company for sure. So where we are, you know, we completed our interim analysis in July, and that analysis indicated that the trial could continue, and it was powered appropriately. We didn't have to add, you know, any additional patients. So that was really good news. Last patient, last visit for the first phase III will be the end of this year. So we're excited about that, and we're on track. First patient, first visit for the second phase III trial will be this quarter. So we've already have approval for that second trial, and we're moving forward.
We will be seeking a meeting, a Type B meeting with the FDA to try to convince them that our 200-patient phase II trial and the efficacy data, that we should have some efficacy look in the first half of next year, that the combination of those two is enough for a BLA filing and approval. And if so, the product will be commercialized, if approved, in 2026. If we have to go through the second trial, that would add a year. So we would be looking at Q1 of 2027 if both trials, both phase III trials, have to be completed for it to be commercialized.
But we are hoping that, you know, in that meeting with the FDA, that we'll be able to convince them with our 200-patient study and the 510-patient phase II, phase, excuse me, phase 3 study, that, that's enough clinical evidence for a BLA approval.
Is that meeting already kind of on the books?
It is not.
Okay.
Yeah. We have to finish the efficacy review, which will be the first half of the year. Once we have that with the phase 2 trial data, which we obviously have, then we'll be able to sit down with them and review it.
Really, no timeline update until the first half of next year?
Yes, essentially.
Okay. Dave, you're going to hate me, but I'm still going to ask financial questions anyway. But with the guidance being pulled for 2023. I'm not going to ask you about 2023. I'm going to ask you about 2024. But when you're looking at numbers today, I think $420 million-$425 million for consensus. Are we kind of hearing the message right in terms of your base business and then the risk factors for the potential LCD?
Yeah, as I mentioned earlier, I think we laid out what happened in the first six months for DFUs and VLUs and those MACs, and so I think that's kind of the calculus for 2024. But even if the LCD wasn't here today, it'd be a little bit early for us to be talking about 2024.
So, understand. Maybe one of the other things to point out is you're kind of still in limbo with the facility build out, but we are getting close to the end of the third quarter. You did expect to give an update, potentially, but anything you can share today in terms of your thoughts on a new facility?
Yeah. As Gary mentioned on the call, you know, we're, we're involved in a bunch of development firms. You know, we're kind of looking at our existing campus in Massachusetts and also in parallel, looking at, you know, other opportunities that we might have. You know, that progress continues. Obviously, there's a lot of draw on the entire team on the LCDs here, but we expect to have an update in the next several months.
Okay. We only have a minute left, and I just feel compelled to sneak in a GLP-1 question, just given the diabetic foot ulcer exposure the company has. But how are you kind of thinking about the impact of GLP-1? It's not going to necessarily be a this quarter or next quarter type of impact, but it could be a longer term headwind for the company in diabetes, and the industry, frankly. But just any initial views on your thoughts on GLP-1 affecting this space?
Yeah. Look, I mean, I think it's an interesting, you know, product, obviously, and, you know, could have an impact on the business long term. I think you're right, it's not the next quarter or two. So we'll continue to monitor as we move forward and see how successful that product is and what the impact is to our overall market.
We're coming up on time, so we'll cut it there. But Gary, Dave, thanks for joining us today. Really appreciate it.
Thank you for having us.
Yes, thank you very much.