Bioventus Inc.

Good afternoon and welcome to the first quarter 2021 earnings conference call for BioVentus 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 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 of the company's Form 10-K for the year ended December 31, 2020, as well as our most recent 10-Q filing to be filed with the Securities and Exchange Commission. You are cautioned not to place under 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 a 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 portions of our website. I would now like to turn a call over to Mr. Ken Reale, BioVentus' Chief Executive Officer. Sir, please go ahead.

Well, thank you, Jesse, and welcome everyone to BioVenta's first quarter 2021 earnings conference call. I'm joined on the call today by Greg Anglum, our Chief Financial Officer. Let me provide you with a brief outline of what we intend to cover. I'll start by discussing our first quarter revenue performance and business trends, followed by a deep dive into the acquisition of Bioness, which we announced on March 30th and we believe represents a great example of how we plan to leverage our inorganic business development strategy to enhance our multi-year growth profile and leverage our significant customer presence across orthopedics, broaden our portfolio, and increase our global footprint. After my opening remarks, Greg will provide you with a more in-depth review of our financial results for the first quarter 2021. and our financial guidance for fuller year 2021, which we updated in our press release this afternoon. And then we will open the call for your questions. Turning to a brief review of our first quarter results, we are pleased to report first quarter net sales of $81.8 million, which represents growth of 4% year over year, which exceeded our guidance expectations and was particularly impressive in light of the continued challenges in our external environment as the recovery from the global pandemic continues. Specifically, we experienced COVID-related business disruptions during the month of January as the spike in cases in the second half of December carried over into the early part of 2021. We also saw modest business disruption related to inclement winter weather in certain parts of the U.S., during the month of February. Importantly, we saw accelerating sales trends throughout the month of March, culminating with nearly 30% year-over-year growth in the final month of the quarter. Despite the ongoing challenges related to the pandemic, we were pleased to see improving growth trends in sales of our HA products during the first quarter. led by 22% growth in global sales of our flagship single injection HA product, Duralane. We also delivered 33% growth in global sales of our bone graft substitutes products compared to the first quarter of 2020. We are encouraged by the continued evidence of recovery from the pandemic that we are seeing in our key markets, including a 9% increase in international sales in the first quarter and growth in all three product verticals over prior year in the month of March. The overall environment continues to improve, and we remain confident in the strong growth expectations we have outlined in our updated guidance for full year 2021, which Greg will walk you through the details later in the call. We continue to expect measured improvements in the operating environment as we move through 2021. fueled primarily by the increasing availability of vaccines and an increasing percentage of vaccinated Americans, as well as Canadians and Europeans. And we continue to expect a return to normalized year over year growth trends in the third quarter of 2021. The outlook for BioVentus has never been more compelling and exciting, and it is entirely a result of our team's execution of our growth strategy. We are poised to deliver strong organic growth in 2021 in the range of 13% to 16% year over year. This organic growth is expected to be fueled primarily by strong global growth in sales of our leading portfolio of PMA-approved therapies for OA joint pain, our portfolio of clinically efficacious and cost-effective bone graft solutions, and continuing to build on our minimally invasive fracture treatment franchise. We are adding to the strong organic profile, growth profile, with the contributions from our recent acquisition of Bioness. And together, we expect to drive impressive growth in our total revenue of 23% to 26% year over year in 2021. While we are pleased with the incremental growth we expect from this acquisition in 2021, we're also encouraged by the fact that we believe the acquisition of Bioness is a great example of how we plan to leverage our inorganic business development strategy to enhance our multi-year growth profile and leverage our significant customer presence across orthopedics, broaden our portfolio, and increase our global footprint leading to consistent double-digit growth. Turning to a discussion on Bioness, which I think will shed some light on why we believe the opportunity of combining these two companies is so compelling. First, a little background on the company. The company was founded in 2004 and has grown to more than 180 employees operating out of three locations in the US, Israel, and the Netherlands. BioNest solutions include implantable and external neuromodulation systems, functional electrical stimulation, or FES, FES products, robotic-assisted gait safety systems, and software-based therapy programs providing functional and therapeutic benefits for individuals affected by pain, central nervous system disorders, and orthopedic injuries. Bioness offers six medical devices within its commercial portfolio, which are distributed and sold on five continents in over 25 countries worldwide. Bioness generated revenue of approximately $40 million in full year 2020, roughly 75% of which was U.S.-based. Approximately 85% of their total revenue comes from the advanced rehabilitation business, the original legacy business at Bioness, with the balance coming from sales of their PNS device called StimRouter, a new product area launched several years ago. The Bioness acquisition gives BioVentus access into two large and growing markets, the peripheral nerve stimulation, or PNS market, and the advanced rehabilitation market. We estimate their medical devices address total global market opportunities approaching $8 billion per year, more than half of which is in the U.S. We believe both of these markets offer attractive growth opportunities driven by demographic trends and the need for safe, effective, non-surgical treatment options for the many patients suffering from post-surgical pain, stroke, multiple sclerosis, traumatic brain injury, spinal cord injury, and cerebral palsy. We expect to drive above-market growth given the highly synergistic nature of the BioNest business with BioVentus' current call points, products, customers, and the overall business scale and structure that BioVentus can provide. With respect to their advanced rehabilitation business, Bioness is the recognized leader in the advanced rehabilitation products with five FDA-approved, commercialized, and clinically supported devices focused on restoring extremity utilization for neuro and ortho patients through FES products, robotic assist gait safety systems, and software learning platforms. The advanced rehabilitation market represents an estimated $1.75 billion global market opportunity and more than $1 billion of which is in the U.S. with a global CAGR projected in the low to mid single digits. Bioness franchise advanced rehab product is the L300GO, a sophisticated device consisting of stimulation and gyroscopes that apply to a patient's leg to restore a patient's normal gait. to walk normally. This is a best-in-class product with a dominant market position in the FES market today, serving the many patients suffering from gait disturbance caused by stroke, head injury, or other diseases. Bioness Advanced Rehab product portfolio also includes an upper extremity solution called the H200 Wireless, a robotic safety gait system called the Vector, and a platform learning solution called the Bioness Integrated Therapy System for Balance, or BIFS, which uses proprietary hardware and software programs to track movements, allowing clinicians to challenge, assess, and track patient balance throughout the treatment continuum. Bioness does business with 17 of the top 20 rehab facilities in the U.S. today, with a team of 35 direct sales representatives. We believe there are multiple synergistic opportunities for BioVentus to enhance the market penetration and long-term growth file profile of Bioness advanced rehab product portfolio, including number one, a broader footprint and access to many more rehab facilities, including those that are adjacent to orthopedic offices. BioVentus has an existing connection to the rehab market already, as 80% of orthopedic offices have a rehab facility associated with or adjacent to such offices. Patients seeing orthopedics in these offices are often referred to the rehab facilities for advanced treatment pre- and post-surgery. We think there is a significant opportunity with the adjacency and call point given there are so many rehab facilities located in close proximity to orthopedic offices, which is BioVentus' primary call point today, allowing us to leverage our larger sales channel to expand their rehab products in those facilities. Number two, in addition to driving market penetration into advanced rehab facilities, We believe there is an even more compelling opportunity to enhance BioNest's long-term growth rate into the low double digits per year. For example, BioVentus has the number two market share in HA for patients suffering from osteoarthritis, and we expect to drive penetration of products such as the L300Go into orthopedic offices to serve OA patients. We also see potential incremental growth opportunities in targeting pre and post total knee patients suffering from gait disturbance due to weakening of the quadriceps muscle. And number three, there is business model synergy as products like the L300Go are durable medical products like Exogen and will allow us to leverage the significant infrastructure we have created from an order management and order to cash perspective. In the medium and longer term, we also see opportunities to leverage BioVentus reimbursement expertise to expand commercial payer coverage. BioNest has been an advanced neuro rehabilitation focused company for many years. We expect to enhance their growth by transitioning them to an advanced neuro and orthopedic rehabilitation-focused company going forward. Turning to the peripheral nerve stimulation business. While the prospects for above-market growth in the advanced rehab business are compelling, we believe the potential growth opportunities that PNS business offers are even more significant. We believe the total addressable market for PNS products is more than $3 billion in the US alone, driven by the estimated seven to eight million extremity surgeries each year and the related post-surgical pain. This acquisition affords us a unique opportunity to grow faster than the overall P&S market, which is projected to grow at attractive rates per annum, fueled by the opioid crisis and the quest for locally-based solutions for treating post-surgical pain. BioNest Peripheral Nerve Stimulation product, StimRouter, is a recognized technology leader in PNS, and its next-generation, less invasive and plannable PNS product candidate, Talisman, gives BioVentis another growth lever following FDA clearance in 2022. Bioness patents protected PNS technology is ideally suited to treat post-surgical pain in the periphery. StimRouter has been implanted in over 3,000 patients since 2017, is sold in more than 10 countries, including the United States, and is the only PNS device backed by a randomized controlled trial. Importantly, StimRouter has synergistic call points with our HA and exogen businesses as sports medicine, total joint, foot and ankle, and podiatric surgery are key call points for StimRouter in addition to pain physicians. While BioNest StimRouter and Talisman products offer compelling solutions for the overall post-surgical pain market, we believe the initial addressable market opportunity is really targeting orthopedic procedures including total knee procedures, rotator cuff injuries, as well as some foot and ankle procedures. We estimate there are more than 1.5 million of these procedures in the U.S. each year where there is a significant unmet need, representing an estimated addressable market opportunity approaching $1 billion annually in the U.S. alone. Post-surgical pain relief for orthopedics is dominated largely by opioid prescriptions and, to a lesser degree, cold therapy. Twenty to thirty percent of these surgical patients are those with prior opioid use, making them ideal candidates for PNS utilization. Peripheral nerve stimulation is an understood and well-recognized alternative to opioids. Cold therapy as well as spinal cord stimulation. PNS is less invasive than other alternative therapies. BioVentis will work closely with the existing BioNest PNS sales force to quickly expand the market penetration of StimRouter through our larger sales team and market access team, and also prepare the market for the less invasive, fully implantable Talisman PNS device expected to be coming next year based on potential FDA clearance in 2022. BioNest neuromodulation technology is highly differentiated, patent protected, and ideally suited to treat pain in the periphery. With established reimbursement coding, the stim router is the only PNS device today with an RCT and is well-positioned as it is a less invasive alternative to other modalities, such as cold therapy, while also avoiding the negative effects of opioid use. The similar customers, including Total Reconstruction, Sports Medicine, and General Orthopedic Surgeons that utilize our HA products for OA pain can take advantage of the pain relief offered by StimRouter for their patients, which allows BioVentis to be involved in more steps in the patient journey, especially for total knee arthroplasty patients who may get HA injections prior to progressing to surgery. In summary, we believe the acquisition of Bioness checks many boxes as it relates to what we believe to be an ideal inorganic business development opportunity. It is a substantial commercial business serving large, global, and growing market opportunities. BioNest offers product solutions that align perfectly with BioVenta's existing product portfolio, which we are most often used to delay or replace the need for an elective surgical procedure, relieve pain, and are focused on reaching patients early on in their treatment paradigm. We believe this acquisition will allow us to leverage our significant competitive advantage of our expansive direct sales and distribution channel, which provides us with broad and differentiated customer reach and allows us to serve physicians spanning the orthopedic continuum, including sports medicine, total joint reconstruction, hand and upper extremities, foot and ankle, podiatric surgery, trauma, spine, neurosurgery, physiatrists, and pain physicians. We also see opportunities to leverage our significant experience commercializing high-value durable medical products and expect our reimbursement team to drive improving reimbursement in order to cash performance for the BioNest business in the years to come. Clearly, we view the BioNest acquisition as a great fit. and one that is accretive to our long-term growth profile and leverages our significant customer presence across orthopedics, broadens our portfolio, and increases our global footprint. Importantly, we look forward to potential acceleration in our multi-year growth profile, fueled by continued progress in our clinical, product development, and new product pipeline, and continued pursuit of our inorganic business development strategy. One more item I would like to call out before turning the call to Greg. We spent time on our Q4 call discussing BioVentus three verticals, OA joint pain treatment and joint preservation, minimally invasive fracture treatment, and bone graft substitutes. As a result of the Bioness acquisition, we have updated and renamed our three primary verticals as follows. Pain treatments and joint preservation, which includes the legacy BioVentis OA joint pain treatment and joint preservation products, plus the peripheral nerve stimulation products sold previously by Bioness. Restorative therapies, which includes the legacy BioVentis minimally invasive fracture treatments, plus all of the advanced rehabilitation products sold previously by Bioness. And our third vertical, bone graft substitutes, remains unchanged. We believe these three verticals offer total addressable market opportunities of more than $12 billion per year, and we believe we have the right strategy, differentiated product portfolio, and an exceptional team, which has us well positioned to drive strong growth as we penetrate this compelling market opportunity in the years to come. With that, let me turn the call over to Greg for a detailed review of our financial results in the first quarter of 2021, as well as a review of our updated 2021 guidance.

Thank you, Ken. Before we begin, I would like to highlight a few items for analysts and investors to bear in mind during my prepared remarks this afternoon to avoid confusion when evaluating our reported results or when reviewing our historical financial results in SEC filings. First, as indicated in our press release this afternoon and further detailed in our 10Q to be filed with the SEC, the historical results for the first quarter of 2020 periods presented are those of BioVentus LLC the predecessor of BioVentus Inc. for financial reporting purposes. On February 16, 2021, the company successfully closed our IPO of common stock. Accordingly, these historical results do not reflect what the results of operations of BioVentus Inc. would have been had the IPO and related transactions occurred prior to such periods. Subsequent to the IPO, and related transactions that occurred in connection with the IPO, the company is the sole managing member of BioVentus LLC and owns 72.2% of BioVentus LLC. The company has a majority economic interest, the sole voting interest in, and controls the management of BioVentus LLC. Accordingly, for the period post IPO, February 16, 2021, to quarter end on April 3rd, 2021, our reported results reflect the attribution of net income to non-controlling interest related to the 27.8% interest held by Smith & Nephew. Second, for the avoidance of doubt, and unless otherwise noted, my commentary will focus on the company's GAAP results for the first quarters of fiscal year 2021 and 2020. For all non-GAAP references, we have included full reconciliations from our GAAP reported results to the related non-GAAP item in our press release this afternoon. Third, my commentary regarding our financial results for the first quarter of 2021 were driven by the legacy BioVentus business only as the acquisition of Bioness did not materially impact our first quarter 2021 financial results. My commentary regarding updated financial guidance for full year 2021 includes the contributions from our acquisition of Bioness post-closing. Turning to a review of our first quarter financial results. Net sales increased $3.1 million, or 4%, year-over-year on a reported basis and increased 3.5% on a constant currency basis. The year-over-year change in net sales by geography was driven by a $2.6 million increase, or 4% year-over-year, in U.S. net sales and a $0.6 million increase in international net sales. First quarter net sales to international customers increased 8.5% year-over-year on a reported basis and 2.5% on a constant currency basis. The year-over-year change in net sales by vertical for the first quarter of 2021 was driven by a 33% increase in global net sales of BGS products and a 0.6% increase in global net sales of pain treatment and joint preservation products, offset partially by a 7% decrease in global net sales of restorative therapies products. Gross profit increased $2.3 million, or 4.1% year-over-year, to $59.6 million, representing approximately 73% of sales unchanged from the prior year period. Our cost of goods line item includes non-cash amortization expense of $5.2 million for the first quarter of 2021 compared to $5.3 million last year. Excluding non-cash amortization, our non-GAAP gross margin was 79.2% compared to 79.5% last year, down 30 basis points year-over-year, driven primarily by the mix of revenue by geography and by vertical as compared to the prior year period. Total operating expense decreased $6.7 million, or 15% year-over-year, to $37.6 million. The change in total operating expense by line item was driven by a $5.6 million decrease or 14% year-over-year in SG&A expense, and to a lesser extent, a $1.2 million decrease or 56% year-over-year in R&D expense. The largest contributor to the year-over-year decrease in first quarter operating expense was a net decrease of $17.4 million in stock compensation expense relating to fair market adjustments of the related pre-IPO stock compensation liability. Keep in mind that our GAAP operating results, I'm sorry, operating expenses include non-cash amortization expenses of which approximately $1.3 million is non-cash intangible amortization expense for the first quarter of 2021 compared to $1.6 million last year. We exclude non-cash amortization from our non-GAAP operating expense in the non-GAAP reconciliation tables detailed in our press release this afternoon. In addition to the aforementioned non-cash amortization expense, first quarter GAAP OPEX included approximately $4.3 million of expenses that have been added back for non-GAAP purposes. $3.2 million of which was driven by acquisition costs related to the Bioness transaction announced on March 30, 2021. Excluding these items, our non-GAAP operating expense was $31.9 million compared to $41.9 million, down $10 million or 24% year-over-year. Operating income was $22.5 compared to operating income of $13.0 million for the first quarter of 2020, an increase of $9.0 million or 69% year-over-year. Non-GAAP operating income was $32.9 million compared to $20.6 million, up $12.2 million or 59% year-over-year. Non-GAAP operating margin was 40.2% of net sales compared to 26.2% of net sales for the first quarter of 2020. Total other income was $2.5 million compared to total other expense of $2.5 million for the first quarter of 2020, a year-over-year change of $4.9 million, primarily due to the settlement of our equity participation right liability in connection with our IPO, which resulted in interest income of $2.9 million. In addition, the change in the fair value of our interest rate swap resulted in interest income of $1.6 million compared to interest expense of $1.1 million for the first quarter of 2020, a year-over-year change of $2.7 million. These year-over-year increases in interest income were offset partially by $0.5 million in net losses related to our equity investment in Cartiheal. GAAP net income was $24.5 million compared to GAAP net income of $10.5 million last year. Non-GAAP net income was $35.5 million