Bioventus Inc.

Good afternoon, ladies and gentlemen, and welcome to the second 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 after the end of the call. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectation 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. Your caution not to place undue reliance upon any forward-looking statements, which speaks 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 a 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 GAAP. We generally refer to this as non-GAAP financial measures. Definitions and reconciliation of this non-GAAP financial measure 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 at www. bioventus.com. I would now like to turn the call over to Mr. Ken Riali, BioVentus Chief Executive Officer. Sir, please go ahead.

Well, thank you, Catherine, and welcome everyone to BioVentus second quarter 2021 earnings conference call. I'm joined on the call today by Greg Englund, our Chief Financial Officer. Let me provide you with a brief outline of what we intend to cover. I'll start by discussing our second quarter revenue performance and business trends, followed by an update on our operating progress and key highlights in the quarter and in recent months. After my opening remarks, Greg will review our financial results for the second quarter 2021 and our financial guidance for full year 2021, which we updated in our press release this afternoon. And then we will open the call to take your questions. Turning to a brief review of our second quarter results. We are pleased to report second quarter net sales of $109.8 million, up 89% year over year, exceeding the expectations we provided on our Q1 call, which assumed growth in the range of 67% to 74% year over year. Our second quarter revenue exceeded the midpoint of this guidance range by roughly $11 million, or 19 percentage points of growth year over year. Needless to say, we are extremely proud of the BioVentus team and the strong growth performance we delivered in the second quarter. We believe our second quarter results were driven by our team's ability to build upon the momentum we saw coming out of the first quarter. and importantly, reflects strong organic growth overall and improving growth trends quarter over quarter. Specifically, our second quarter revenue results reflect organic growth of 15% as compared to the second quarter of 2019, driven by strong organic growth versus 2019 in the US of 18%. While we are very pleased with this growth performance, We are even more encouraged by the fact that our growth trends over 2019 accelerated quarter to quarter, which reflects improvement in the overall operating environment in the period. I would be remiss if I did not mention the other key contributor to the better than expected revenue results reported in Q2, and that is the strong growth performance from our recent acquisition of Bioness. We are very pleased with the progress we have made in the first 100 days post-closing, and we believe the strong execution of our integration plan helped us deliver above-plan revenue contribution from Bioness in Q2. I'll share a little more color on our integration efforts later on the call, but for now, let me just say that we are proud of the early evidence that our inorganic business development strategy and execution-driven plans in integrating new companies quickly and efficiently is working. Diving a little deeper into the drivers of our growth performance in Q2, for the avoidance of doubt, all growth rates referred are relative to the second quarter of 2019 in the interest of stripping out any benefit to our growth performance from an easy comparison. our organic growth of 15% in Q2 was driven by 18% growth in the US, which more than offset mid-single digit declines in our international sales. By global vertical, our organic sales growth versus Q2 2019 was driven primarily by 19% growth in sales of pain treatments and joint preservation products, led by 81% growth in global sales of our flagship single injection HA product, Duralane, and 59% growth in global sales of our bone graft substitute products, offset partially by a 13% decline in global sales of our restorative therapies products. As mentioned earlier, we are encouraged by the continued evidence of recovery from the pandemic that we are seeing in our global verticals, particularly in our pain treatment and joint preservation products, which posted high single-digit growth over 2019 in the first quarter and 19% in Q2, and in our restorative therapies vertical, where sales trends showed modest improvement compared to Q1. The overall environment continues to improve, and we are confident in the 26% to 29% net sales growth we now expect as outlined in our updated guidance for full year 2021. We continue to expect measured improvements in the operating environment as we move through 2021, fueled primarily by the increase in 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. Turning to a review of our operating progress and recent highlights. First, our integration of Bioness is progressing nicely. We are on target to have the integration largely completed by year end. By all indications, 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 with attractive growth that is accretive to our long-term growth profile. Bioness offers product solutions that align perfectly with BioVentus' existing product portfolio. 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 and order-to-cash performance for the Bioness business in the years to come. As we continue to execute our integration strategy in the coming months, we will be working closely with the existing Bioness Peripheral Nerve Stimulation, or PNS, sales force to expand the market penetration of StimRouter through our large 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 clearance in 2022. We have also started a pilot with our sales team in the restorative therapies business to introduce StimRouter to lower extremity clinicians that are currently prescribing exogen. Bioness neuromodulation technology is highly differentiated, patent protected, and ideally suited to treat pain in the periphery. With established reimbursement coding, the StimRouter is the only PNS device today with an RCT, and is well positioned as it is a less invasive alternative to other modalities while also providing or avoiding the negative effects of opioid use. We look forward to sharing more updates on our integration progress in the coming months. Two other operating highlights of note, we launched a new product in our bone graft substitutes business and we welcomed a new member to our board of directors. Building on a successful launch in Q1, limited launch, we entered full commercial launch of our OsteoAmp Flowable in July. OsteoAmp Flowable is an injectable allograft bone graft substitute solution developed for a variety of patient procedures, including lumbar spine fusion, cervical spine fusion, and foot and ankle fusion. We have been extremely pleased with the early market response to this differentiated product and look forward to its increasing contribution to our bone graft substitutes vertical in the years to come. Most importantly, OsteoAmp Flowable, due to its injectable format, can be used in minimally invasive spinal fusions, the fastest growing area in spine. Also in July, we announced the appointment of Mary Kay Ledone to the company's board of directors. Mary Kay is an accomplished executive serving large global healthcare companies over her more than 30-year career. We are very pleased to welcome Mary Kay to our board as she will provide valuable experience and insights as we execute our strategy of growth acceleration through new product development and M&A. Her global financial strategic planning and business development experience, as well as her strong track record of leading best-in-class investor relations programs, will be invaluable to BioVentus. Before turning the call over to Greg for a review of our financial results and updated guidance, I want to share some thoughts on two items of note in recent weeks. On July 29th, we announced that BioVentus and Masonix entered into a definitive agreement under which BioVentus agreed to acquire Masonix in a cash and stock transaction. Masonix stockholders will receive aggregate consideration that values Masonix at approximately $518 million on a fully diluted basis based on BioVentus seven-day volume-weighted average stock price, or BWAP, of $16.6284 per share as of July 27th, 2021. As outlined on our call on the 29th, we see this acquisition as a strong strategic fit, given that at BioVentus, we are a company focused on building a portfolio of clinically differentiated, minimally invasive treatments to help patients heal faster and relieve pain. Across a $13 billion addressable market opportunity, we are the number two player in HA therapy with the fastest growing single injection therapy. We are the number one player in minimally invasive fracture treatment and advanced rehabilitation. We are the fastest growing participant in bone graft substitutes, and we are the technology leader in peripheral nerve stimulation. We believe the acquisition of Masonics represents a compelling opportunity to extend our leadership and expand the breadth and depth of our offerings by adding $2 billion to our addressable market. We believe the complementary nature of the two businesses will give the combined company significant diversity and scale across a range of care settings, geographies, and therapeutic areas. The combined product portfolio following the closing will serve large market segments across orthopedics, spine, and lower extremity, as well as neurosurgery. Together, we believe these factors will place BioVentis in a unique market position, with leading technologies and specialized sales forces numbering over 500 sales reps, serving a $15 billion total addressable market. across the hospital, ambulatory surgical center, and office care settings. We believe the combination of our two businesses will create a differentiated growth medical technology company. And importantly, we believe it will enhance our long-term growth profile to the tune of approximately 100 basis points of additional revenue growth to the combined company on a pro forma basis. We strongly believe the enhanced growth profile combined with BioVentus' expected $20 million of cost synergies will create strong financial returns for BioVentus shareholders. We are clearly excited by the opportunities in store for the combined companies and look forward to the close, which we continue to expect in the fourth quarter and officially welcoming the Masonics employees to BioVentus. In terms of our near-term milestones for the investment community to monitor in the coming months, Masonics is planning to file their 10K for the 12 months ended June 30, 2021, in early September, and are targeting the filing of an S4 a couple weeks later. We have designated a team to lead the integration, and planning is already underway. we expect to be prepared to hit the ground running as soon as the transaction closes in the fourth quarter. Finally, I want to provide a brief update on a recent clinical milestone for Agilecy, a pipeline product for BioVentis via an equity investment in a privately held company named CartiHeal. Agilecy is an off-the-shelf scaffold implant that is designed to regenerate hyaline cartilage and subchondral bone simultaneously. The Agilisi implant has been implanted in more than 190 patients outside the United States with follow-up of more than four years and is CE marked. The product was granted breakthrough device designation by the FDA last year and recently announced high-level results from a two-year randomized and controlled pivotal The study's objective was to demonstrate the superiority of the Agilisi implant over the surgical standard of care, microfracture, and debridement for the treatment of cartilage or osteochondral defects in both osteoarthritic knees and knees without degenerative changes. We estimate this to be a $1.3 billion market opportunity. This is a noteworthy clinical milestone given our equity purchase agreement with CardiHeal. As disclosed in our SEC filings, the agreement provides us with an exclusive option to acquire 100% of CardiHeal shares upon pivotal clinical trial success, including achievement of certain secondary endpoints and FDA approval of the Agilecy device. with a label consistent in all respects with pivotal clinical trial success. Consideration for the acquisition of all of the shares of Cartagheal would be $350 million with an additional $150 million payable upon achievement of certain sales milestones related to agility. On August 2nd, 2021, Cartagheal provided us a statistical report containing the results of the pivotal clinical trial. We are currently reviewing the report to assess if it is consistent with the terms of the agreement. We have the right to terminate our option agreement at any time ending 30 days after receipt of the statistical report from Car2Heal upon payment of a breakup fee of $30 million. If we decide to move forward with Car2Heal, we will be required to put $50 million into escrow as a deposit towards the $315 million of consideration owed following the receipt of PMA approval. We are not able to discuss the clinical study results or the statistical report at this time, but we intend to announce our decision regarding the equity agreement via a press release. Some notes to bear in mind regarding our CartiHeal relationship. Number one, if we decide to move forward with CartiHeal, we have an option to acquire the company, but not until Agilecy receives PMA approval. Number two, CartiHeal submitted the PMA non-clinical module and the manufacturing module to the FDA earlier this year and continues to expect the submission of the final clinical module and Q4 of 21. Number three, our expectation regarding the potential timing of any acquisition of Car2Heal has not changed. We continue to expect the earliest a post-PMA approval acquisition would come is mid-2022. And number four, we believe we have the requisite capital to execute our strategic growth initiatives for the existing BioVentus business to finance our transaction with Masonics, and to continue to invest in our product pipeline, including Agilecy. With that, let me turn the call over to Greg for a detailed review of our financial results in the second quarter of 2021, as well as a review of our updated 2021 financial guidance.

Thank you, Ken. For the avoidance of doubt, and unless otherwise noted, my commentary will focus on the company's non-GAAP results for the second quarters of 2021 and 2020. We've included definitions and full reconciliations from our GAAP reported results to the related non-GAAP item in our press release this afternoon. Turning to a review of our second quarter financial results, GAAP net sales increased $51.8 million or 89% year-over-year on a reported basis and increased 88% on a constant currency basis. Gross profit increased $38 million or 84% year-over-year and represented 76.5% of sales compared to 78.7% of sales in the prior year period. The year-over-year change in gross margin was driven primarily by the mix of revenue by geography and by vertical as compared to the prior year period. Note, our gross profit excludes non-cash amortization expense of $5.6 million for the second quarter of 2021 compared to $5.3 million last year. Second quarter of 2021 gross profit also excludes $2.1 million of inventory step-up costs related to our acquisition of Bioness. Total operating expense increased $31.3 million or 79% year-over-year to $70.8 million. The change in total operating expense by line item was driven by a $29 million increase or 79% year-over-year in SG&A expense, and to a lesser extent, a $2.2 million or 86% year-over-year in R&D expense. The increase in operating expense compared to the prior year period was primarily driven by investments in our selling and marketing organization, public company costs, which did not impact the prior year period results, and the resumption of discretionary spending, including travel and related expenses given the more normalized business environment as compared to the significant cost reduction efforts in the prior year period as a result of the COVID-19 pandemic, as well as operating expenses related to our acquisition of Bioness, which did not impact the prior year period. As detailed in the non-GAAP reconciliation tables in our press release this afternoon, we exclude non-cash amortization, acquisition costs and expenses, and other non-recurring costs from our non-GAAP operating expense. Second quarter operating expense also excludes two non-cash items that did not impact prior year period reported results. Specifically, a $0.6 million of non-cash expense related to the change in fair value of contingent consideration and $5.7 million of non-cash charges related to impairment of assets related to harbor, of which $5.2 million was attributable to non-controlling interest. Operating income was $13.3 million, compared to operating income of $6.2 million for the second quarter of 2020, an increase of $7.1 million, or 113% year-over-year. Operating margin was 12.1% of net sales compared to 10.7% of net sales in the prior year period. In summary, our performance across the P&L in Q2 resulted in non-GAAP net income of $9.6 million, up 168% year over year, and adjusted EBITDA of $19.9 million, up 186% year over year. As detailed in the non-GAAP reconciliation table in our press release, adjusted EBITDA excludes the impact of stock compensation expense and other non-cash or non-recurring items. We believe this provides supplemental information about the underlying operating performance of our business. Turning to the balance sheet, as of July 3, 2021, the company had $136.1 million in cash and cash equivalents and $181.1 million in debt obligations, compared to $86.8 million in cash and cash equivalents, and $188.4 million in debt obligations as of December 31, 2020. As of July 3, 2021, we had approximately $50 million of available borrowing capacity on our revolving credit facility. Turning to a review of our fiscal year 2021 financial guidance, which we updated in our press release this afternoon. For the avoidance of doubt, our updated 2021 financial guidance includes the contributions from our acquisition of Bioness following the closing date of March 30, 2021, but does not include contributions from the proposed acquisition of Masonics, which was announced on July 29th, as it is yet to close. The company expects to update its 2021 financial guidance to include contributions from Bisonics following the closing, which is expected in the fourth quarter of 2021. For the 12 months ending December 31, 2021, the company is reaffirming the updated revenue guidance provided in our preliminary second quarter revenue results press release on July 29, which called for net sales of $405 million to $415 million, up approximately 26% to 29% year-over-year. The increase in our net sales guidance range is driven by the stronger-than-expected sales results in the second quarter of 2021. The updated net sales guidance range assumes net sales from Legacy BioVentus, Inc., of $372.5 million to $380.5 million, representing organic revenue growth in the range of approximately 16% to 18% year over year, and net sales from the acquisition of Bioness Inc. of approximately $32.5 million to $34.5 million. With respect to our profitability guidance, we now expect GAAP net income of $13.0 million to $17.6 million, of which Legacy BioMentis is expected to contribute GAAP net income of $29.2 million to $33.3 million, with BioNest contributing the remaining balance. We now expect non-GAAP net income of $67.1 million to $69.5 million, of which Legacy BioMentis is expected to contribute non-GAAP net income of $75.6 billion to $76.6 million, with BioNest contributing the remaining balance. We now expect adjusted EBITDA of $77.8 million to $82.0 million, of which Legacy BioVentus is expected to contribute adjusted EBITDA of $82.8 million to $86.1 million, with BioNest contributing the remaining balance. In addition to the formal financial guidance provided in this afternoon's release, we would like to provide some key assumptions to bear in mind when evaluating our growth expectations for 2021. First, our full year 2021 net sales guidance range assumes the following for net sales by geography. U.S. net sales growth in the range of 23% to 26% year over year and international net sales growth is expected to be in the range of 55% to 60% year over year. These ranges assume U.S. sales growth on an organic basis in the range of 15% to 18% year over year and contributions from our acquisition of Bioness, and international sales growth on an organic basis in the range of 22% to 24% year over year, as well as contributions from our acquisition of Bioness. For net sales by vertical, our full year 2021 guidance now assumes low to mid-20s percent growth in global sales of pain treatments and joint preservation products, driven by low 20% organic growth and contributions from Bioness. Low to mid-30s percent growth in global restorative therapies growth, driven by low single-digit organic growth and contributions from Bioness. and high 20s to low 30s percent growth in global sales of BGS products. Second, we continue to expect to see measured improvements in the operating environment as we move through 2021, fueled by the increasing availability of vaccines and an increasing percentage of vaccinated Americans, Canadians, and Europeans. Our full-year 2021 guidance continues to assume a return to normalized year-over-year growth trends in the third quarter of 2021. Finally, with respect to our expectations for financial performance in 2021, we would like to provide some of our assumptions to help evaluate our full-year 2021 guidance for GAAP and non-GAAP net income. For the full-year 2021 period, we expect non-GAAP gross margins of approximately 77.6% to 78.1%. Gap operating expense growth of 23% to 26% year-over-year, driven primarily by the incremental operating expenses related to our acquisition of Bioness, low double-digit growth in legacy BioVentus operating expenses compared to 2020. Note the increase in gap operating expense growth range versus prior guidance is driven by the non-cash impairment charges and non-cash expenses from contingent consideration in the second quarter of 2021. We also expect interest expense net of approximately $2.3 million, total non-cash depreciation and amortization of approximately $31 million to $32 million, non-cash stock comp income of approximately $2.7 million to $3.7 million, and weighted average diluted Class A shares of approximately 42 million. With that, I'll turn the call back to you, Ken.