Description

“I don’t know how these guys aren’t in jail. This is criminal.” – Industry expert regarding Organogenesis.

Organogenesis has been ripping off the government to the tune of $250mm+ annually.  Organogenesis’ reimbursement game appears to have ended on October 1st when CMS dropped ASP coverage of Affinity, ~40% of ORGO sales and all profits. Regardless, new legislation going into effect January 1st 2022 prevents ORGO from ever playing this game again. ORGO is a zero.

About

Organogenesis is a wound care company headquartered in Canton, Massachusetts. The Company was founded in 1985 and went public via a SPAC in early 2019. Wound care products represent ~90% of sales and surgical and sports medicine products represent ~10% sales. ORGO has a $1.63b market cap and is a consensus buy. 

For more details on the company see the recent presentation and the 10K. 

How We Got Here

Avista Healthcare was a SPAC that listed in September 2016. Avista initially tried to buy another company, but the deal broke in early 2018. With just two weeks left on the clock, Avista announced a deal to acquire Organogenesis in August 2018. 

I had been following Organogenesis as part of my research on MiMedx and was excited to have another public company in the space. In the prospectus I learned ORGO is a structurally unprofitable player whose growth was driven by an unsustainable advantage called “pass through” status. Pass-through status is designed to help new innovative products get adopted by the market by giving them favorable reimbursement. In the wound care world, this means a product doesn’t fall under bundle pricing limits, which results in better economics for the doctor and facility for use.  

Organogenesis’ main product, PuraPly, had pass-through status from mid-2015 until the end of 2017 which helped fuel ORGO’s growth. My industry contacts think PuraPly should have never received pass-through status since the product was neither new nor innovative. PuraPly has been around for over a decade and is just a collagen matrix with antimicrobials. You could make this product yourself with off the shelf products available at CVS. Regardless, Organogenesis was able to use its government connections to get pass-through status. 

PuraPly lost pass-through status in January 2018 and sales declined over 50%. ORGO’s total advanced wound care sales declined ~20% in the first 9 months of 2018 and losses ballooned from $4mm to $56mm. 

Organogenesis miraculously regained pass-through status October 2018 through September 2020. This was a shock to all my industry contacts. Avista was able to sell a SPAC growth story and close the deal. 

The SPAC was poorly received by the market and ORGO quickly traded down into the mid-single digits. 

ORGO’s sales growth remained anemic and the Company couldn’t generate positive adjusted EBITDA. The majority of ORGO’s sales at the time; Apligraft, Dermagraft, PuraPly, and amniotics, were legacy products that weren’t growing. ORGO was burning ~$10mm of cash per quarter and by 3Q19 was down to $23mm of cash, with $83mm of debt. 

ORGO needed money and raised $50mm in November 2019 by selling 10mm shares at $5. The deal was announced at $8 and Avista, the SPAC sponsor, had to buy 60% of the deal to get it done. 

ORGO’s results did not improve and cash burn stayed persistently high at $10-20mm a quarter. The company ended 2Q20 with $40mm of cash and $100mm of debt, the same net debt level as when management raised cash in November 2019. The stock traded below $4 and guidance was for PuraPly sales to decline 50% in 4Q20. Who would keep funding this company? With a mediocre product portfolio and persistent EBITDA losses, the writing was on the wall. 

Organogenesis Breaks Bad

On August 24, 2020, two weeks after 2Q20 results, ORGO’s CFO resigned with his resignation effective 6 days prior to the announcement. You can imagine my surprise when two months later ORGO pre-announced blowout 3Q results. In the middle of covid, just before the Company was going to run out of money, ORGO grew sales 50%. ORGO immediately priced 17.5mm shares at $3.25 and raised enough cash to stay in business. 

I could not explain Organogenesis’ success. Competitors like MiMedx, Smith and Nephew, and Integra could not either. They all fielded the same questions; how could they be losing share to ORGO? They all swore they weren’t.  Of course the sell-side didn’t ask any tough questions. “So amniotics and selling into private practices helped drive growth? OK thanks, nice quarter!”  “So sales rep productivity is up 75% despite covid and losing pass-through? Great, nice quarter!” 

ORGO’s stock rocketed from $3 to almost $25. Even though ORGO lost pass-through status for Puraply in 4Q20, sales did not decline 50% as guided but instead kept surging in 4Q20. 

The Affinity and PuraPly XT Government Rip Off

Organogenesis has a fresh amnion product called Affinity. This product was pulled from the market in 1Q19 but was brought back at the end of 1Q20. Affinity has no intellectual property and limited clinical studies to prove efficacy or value versus standard of care. Any competitor could make a comparable fresh amnion product. 

Prior to being pulled off the market Affinity was a small single digit percentage of sales and priced comparable to other amniotic products at ~$150/sq cm. Affinity is now ~40% of sales, priced 4x higher than comparable amniotics, and is 100% of ORGO’s non-PuraPly related growth. 

New products that don’t have a Medicare/CMS price (it takes a few quarters and sufficient volume before CMS sets a price) are priced by the Company in the Red Book. This is a “wholesale” price, sometimes called an average wholesale price (AWP) or wholesale acquisition cost (WAC), that the government will follow until CMS determines reimbursement based on actual sales prices. Organogenesis didn’t sell Affinity at wholesale or to hospitals, so management set the Red Book price exorbitantly high. This could have been upwards of $800-1000/sqcm - or $2k to $6k for Affinity’s two sizes. Medicare accepts this price and reimbursed providers at the Company determined rate. Wholesale price manipulation is a common area of Medicare fraud.

Organogenesis gave doctors, often ethically questionable podiatrists that had been hurting from covid, rebates on Affinity. These rebates could be upwards of 30% and the doctors pocket the spread between the reimbursed amount and what they paid Organogenesis. I estimate a profit of $500-$2,000+ per application. "Marketing the spread,” convincing doctors to use a product based upon how much they make, is illegal. I have been told Organogenesis sales reps break these rules. 

Affinity was very profitable for doctors to use and Affinity drove almost all of Organogenesis growth. The Company decided to exploit the same loophole with its new PuraPly XT product. Instead of PuraPly declining 50% as guided, PuraPly grew 30%. 

ORGO’s Affinity game ended on 7/1/21 when CMS set a price of $584/sq cm. This means that instead of collecting a large spread and making thousands in profit per use, Doctors will only be reimbursed for the cost of the product plus 6%, which is the industry standard. Here is a doctor explaining the game ORGO played - please click this link and read their comments. 

Pricing can be found on the CMS website on the ASP Files. July pricing for Q4159 (Affinity) is $584/sqcm. Pricing is now set on ORGO’s reimbursement page; click the link for Physician Office at the bottom. The Company won’t give you previous quarters but you can manually change the link from Q3 to previous quarters to see prior pricing, here is 2Q20.

Payment Allowance Limits for Medicare Part B Drugs, Effective July 1, 2021 through September 30, 2021

Industry experts told me CMS is extremely frustrated with Organogenesis because private companies have stolen this playbook to raise prices. As a result, NEW LEGISLATION that is effective January 2022 will require immediate reporting of all biologics pricing to Medicare so a permanent price can be set. Here are some reps discussing the change. This new legislation effectively ends the redbook/wholesale pricing games played by Organogenesis and others.

However, it appears we don’t have to wait till January 2022 because AFFINITY WAS DROPPED FROM MEDICARE ASP COVERAGE ON OCTOBER 1st. The new October 2021 ASP Pricing File has no Q4159 HCPCS Code (Affinity). Calls to over half of the regional MACs (Medicare Administrative Contractors) confirm Affinity is no longer covered. One MAC said Affinity was not added back to the invoice list, where it needs to be listed to be invoiced. Most others told me they do not have an invoice list and the product needs to be invoiced for reimbursement. And CMS will reimburse at its discretion. That’s a lot of uncertainty for an expensive product where reimbursement will collapse to product cost plus 6%, at best. An industry contact described this coverage drop for Affinity as a killer. 

Payment Allowance Limits for Medicare Part B Drugs, Effective October 1, 2021 through December 31, 2021

ORGO potentially lost ~40% of sales, ~100% of growth, and over 100% of profits. The fact CMS pulled Affinity might mean Organogenesis is under investigation. Eargo (EAR) stopped receiving payment from the government for their hearing aid device earlier in the year and a few months later they announced a DOJ investigation. 

Industry contacts have mentioned that some large Affinity users are being audited by Medicare. CMS didn’t have the bandwidth for audits during covid, but now does. I was told CMS was very liberal with reimbursement during covid in order to help keep doctors financially afloat, but they are now clawing back questionable reimbursement payments.

I estimate Organogenesis ripped off Medicare to the tune of $250+ million through Affinity and PuraPlyXT. $250mm of ORGO sales equates to $360mm of CMS payments at a 30% spread. I do not think this has gone unnoticed. Insiders and Avista have sold over $140mm of stock and the recent drop of Affinity from CMS coverage suggests the game is ending. 

Valuation and Target

At $12.05 per share, ORGO has a $1,630mm market cap and $20mm of net cash. 

ORGO’s is currently valued at ~3.5x sales, which is only slightly below industry takeout multiples. I think 2021 sales estimates of $460mm could crash to $200-250mm in 2022 as a result of losing Affinity and PuraPly XT pricing arbitrage volumes. The company was not profitable at $300mm of sales and will likely burn $100mm per year at $200mm of sales. This will make another stock sale challenging. 

My target price is $0.  

Summary

• ORGO went public via SPAC thanks to a two year reimbursement advantage called pass-through on PuraPly. PuraPly was ~50% of 2019 sales.
• ORGO struggled as a public company. It barely grew sales and burned ~$10mm cash per quarter.
• ORGO raised money at $5, half the SPAC price, in November 2019 and SPAC sponsor had to anchor 60% of the deal.
• PuraPly was expected to decline 50% when it went off pass-through in October 2020. ORGO was running out of cash and had limited access to capital.
• A questionable reimbursement scheme with Affinity saved the Company. ORGO priced Affinity 5-10x higher than comparable products which made its usage very lucrative to doctors. ORGO’s CFO quit after this scheme started. 
• ORGO sales and profitability exploded in mid 2020 (peak Covid) as a result of Affinity.
• ORGO played the same game with a new version of PuraPly, PuraPly XT, by charging the government an excessively high price and allowing doctors to profit handsomely during Covid. This allowed PuraPly to grow 25% instead of declining 50%.
• ORGOs stock increased 8x in 6 months and insiders sold $140mm.
• ORGO’s game with Affinity ended in July 2021 when CMS set a permanent price for Affinity. PuraPlyXT does not have a set ASP yet.
• CMS/Medicare has been frustrated with ORGO’s games. New biologics pricing and reporting rules go into effect January 2022.
• CMS drops ASP coverage of Affinity, ~40% of ORGO sales, starting October 1st 2021.

Conclusion

Organogenesis has been cheating CMS. Insiders have dumped millions of worthless stock. Grab your popcorn to watch this unravel.  

Risks

ORGO is able to regain CMS pricing at inflated levels. 

ORGO intentially dropped off the ASP list in order to play more wholesale pricing games in 4Q21 and in anticipation of taking pricing even higher for 2022 to get in front of new rule changes. So it takes Medicare longer to shut down their games.

Catalyst

Earnings misses, investigations, executive departures, negative media stories, additional reimbursement challenges for the company.