Bioventus Inc.

Good day, and thank you for standing by. Welcome to the BioVentus, Inc. third quarter of fiscal year 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. If you require further assistance during the conference, please press star zero. I would now like to hand the conference over to your speaker today, Dave Crawford, Vice President, Investor Relations. Thank you. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the BioVendus 2021 Third Quarter Earnings Conference Call. With me this morning are Ken Riali, CEO, and Greg Anglum, Senior Vice President and CFO. Ken will begin with a review of the quarter and the current environment, and then provide an update on our recent acquisitions. Greg will then provide further detail on our third quarter results and update on our 2021 planning outlook. We'll finish the call with Q&A. A presentation for today's call is available on the investor section of our website, bioventus.com. Before we begin, I would like to remind everyone that our remarks today 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 risk factors 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 speak only as of the date that they are 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 reference to certain financial measures that are not calculated in accordance with generally accepted accounting principles for GAAP. We generally refer to these as non-GAAP financial measures. Definitions and reconciliations of those 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 at www.bioventus.com. Now I'll turn the call over to Ken.

Thanks, Dave. Good morning, everyone, and thank you for your interest in BioVentus. As we enter the final months of a transformational year, The outlook for BioVentus has never been more exciting due to the exceptional execution of our growth strategy by our entire team. I'm encouraged by our commercial team's continued performance and resiliency as they delivered another quarter of double digit organic growth and continue to respond to the challenging dynamics brought on by the pandemic. As we work to integrate Bioness, and my sonics, we remain steadfast on returning patients back to their active lifestyle. I will begin my remarks with a review of our results for the quarter before providing an update on our recent acquisitions. Revenue increased 27% for the quarter to $109 million despite some continued challenges from the pandemic as we were able to more than offset these headwinds with strong execution across our growth initiatives and other areas of our diversified portfolio. We faced some ongoing challenges from the pandemic, concentrated in the bone graft substitutes business as elective procedures were interrupted in specific regions of the country during the quarter. As we moved into October, we saw conditions begin to gradually improve, and we currently expect to trend closer to a more normal environment by the end of the fourth quarter. Even with these challenges, we delivered an exceptional quarter of 14% organic growth. In order to give you a better sense of what the growth looked like against our pre-COVID levels, organic growth compared to the third quarter of 2019 across our three verticals in more detail. Across pain treatments, we saw double-digit growth driven by continued share gains for our single-injection Duralane therapy and our three-injection Gelson therapy. We remain well-positioned to take advantage of the shift towards single and three-injection treatment for osteoarthritic knee pain. Sterilane, which was the last single injection product launched four years ago, now represents roughly 20% share of the single injection market. Our ability to increase our share is driven by multiple factors. First, our market access strategy of working with private payers is fueling growth as we further augment the strong reimbursement for the therapy. Second, Duralane has the highest molecular weight of single injection therapies available, which produces the longest residence time in the joint and an extended half-life. Notably, the American Academy of Orthopedic Surgeons recently released updated clinical practice guidelines stating certain knee osteoarthritis patients showed statistically significant improvement from high molecular weight treatments. Like Duralane, Gelson represents an opportunity to further expand our share. Jelson also experienced significant double-digit growth for the quarter and has demonstrated continued share gains. Third, our five-injection therapy, Suparts, continues to maintain its leading share position of approximately 40%. While Duralane and Jelson are below this share in their respective categories, there is significant room for additional growth in coming years for both products as they increase penetration in their respective markets. As the only company with a portfolio of HA products across single, three, and five injection therapy, We have now consistently held the number two share position across the entire category and look to become the market leader in the coming years. Turning to our bone graft substitutes vertical, we saw mid single digit growth despite the interruption and elective procedures I mentioned earlier. Helping fuel our momentum has been the recent launch of OsteoAmp Flowable, our injectable allograft bone graft substitute solution, which can be used for a variety of procedures, including minimally invasive spinal fusions, the fastest growing area in spine. We are excited by the initial market reaction and feedback from surgeons, and we continue to see bone graft substitutes as a double-digit growth opportunity. Finally, we saw double-digit growth across our restorative therapies vertical, bolstered by our advanced rehabilitation products acquired as part of the Bioness acquisition. Additionally, we initiated a pilot to utilize our call point access and Salesforce to further accelerate Bioness double-digit growth. The pilot focused on our L300 Go product for patients with gait disturbance, leverages our Salesforce's relationships with orthopedic surgeons to prescribe the L300 for individuals who receive a total knee replacement but experience thigh muscle weakness during their rehabilitation. Additionally, our legacy Exogen business grew mid-single digits organically during the quarter. This performance benefited from growth in our international region, which faced an easier comparison in the third quarter, given the impacts of the pandemic in the prior year. Across our international segment, growth of 39% was enhanced by our Bioness acquisition, while organic growth for the quarter was 11%. With close to 10% of our sales coming from international regions, our mix of international sales is below peers. As we introduce new products across various regions and execute against our go-to-market strategy, we expect to see international expansion as a catalyst for future growth in the near and mid-term. Now let me update you on our recent acquisitions. In the third quarter, Bioness contributed $11 million of revenue and continues to track ahead of our expectations. Revenue was strong across both advanced rehabilitation products and peripheral nerve stimulation, or PNS. The integration of Bioness continues to progress as planned, with several key milestones having been completed. we are realizing planned synergies and reached break-even profitability at the end of the third quarter. As we look ahead to next year, we have identified specific synergy targets and see Bioness contributing positive EBITDA. Our timeline for full completion of the integration remains the first quarter of 2022. In addition to the financial benefits, BioNest is providing us valuable experience as we prepare to begin the integration of Misonics and look to further develop integration as a core competency of BioVentus. In addition to the L300 Go opportunity I mentioned earlier, we also began a pilot for PNS utilizing our existing sales force. We are encouraged by the initial results And while a small piece of our portfolio today, we see P&S as a meaningful mid-term growth driver for our overall business. Turning to the recently announced closing of our Misonics acquisition, we are excited to welcome the Misonics team to BioVentus and for Stavros Bizi-Giannakis and Pat Beyer to join our board of directors. I am also pleased to welcome Sharon Klugowitz, who has served as COO of Misonics and will report to me as part of our executive team and the role of Senior Vice President of Quality and Regulatory Affairs. The completed transaction creates a high-growth medical device company with a $15 billion total addressable market and the ability to gain significant market share utilizing our nearly 500-person sales force across our three verticals. The combined business allows us to go deeper with our customers across surgical applications in spinal fusion, neurosurgery, and wound treatments. The deal also furthers our strategy of accelerated revenue growth through acquisitions that leverage our existing infrastructure. We are confident Misonics will drive substantial shareholder value, as it is expected to be accretive to our organic growth profile while generating $20 million of cost synergies by the end of 2023. While we were waiting to clear the regulatory hurdles for the acquisition to close, we assembled an internal integration team and coordinated with the leadership at Misonics to develop our integration plan and timeline. We will kick off the integration of Misonics in the first quarter. While both Misonics and Bioness provide us with immediate catalysts for growth, Our business development activity is also focused on ensuring BioBentis is positioned to maintain double-digit organic growth in the midterm. Last quarter, I spoke to you about the opportunity we were evaluating on whether to preserve our right to exercise our option to purchase CardiHeal. As we announced in late August, after extensive evaluation, we placed $50 million into escrow as a deposit. We plan to finance the remaining portion of the potential acquisition of CardiHeal with additional debt. While there are still steps to take for CardiHeal to gain FDA approval for their Agilecy implant, Our due diligence strengthened our belief in the $1.3 billion addressable market opportunity and that it will be a high-quality addition to our portfolio. In coming to our decision, we discussed the merits of agility with over 600 healthcare professionals. In addition, we engaged over a dozen private payers to understand the reimbursement landscape for this unique therapy. Throughout these discussions, there was consistent feedback that agility fills a significant unmet need for surgeons in the treatment of patients with cartilage defects and knee osteoarthritis. Likewise, medical directors of private payers expressed a willingness to support reimbursement for agility based on the strength of the clinical data, which demonstrates superiority to current surgical standard of care. While we are excited about the opportunity for Agilecy to receive FDA approval and to acquire Cardi-Heal in the second half of next year, we don't expect the acquisition to drive material growth until a few years after launch, as private payers steadily begin reimbursing Agilecy. We will continue to provide updates on the status and timing of the potential acquisition as we gather new information on the approval. While NA remains a meaningful part of our long-term growth strategy, and we continue to build new relationships, we are currently highly focused on successfully integrating Bioness and Misonics. In conclusion, we continue to build momentum across our business. execute on our growth strategy, and drive further market penetration with our HA and bone graft substitutes products. I am confident we have enhanced our growth profile with the acquisitions of Bioness and Misonics and will leverage our commercial infrastructure to deliver consistent double-digit growth while ensuring we deliver on our cost synergies. Now I'll turn the call over to Greg.

Thanks, Ken. And let me add how encouraged I am by our team's success in the quarter as we continue to execute in a challenging environment while showing meaningful progress against our growth initiatives throughout the year. Let's begin with a review of our third quarter results. Revenue of $109 million increased 27% compared to last year. We saw a 14 percentage point increase from organic revenue, along with a 13 percentage point benefit related to Bioness. Although hospital utilization was negatively impacted by a new wave of COVID-related hospitalizations during the third quarter, we were able to deliver strong sales as we benefited from our diversified portfolio and the execution of our commercial teams. Our sales performance drove adjusted EBITDA of $21 million and adjusted diluted earnings per share of 25 cents. Across pain treatments, we grew 24%, broken down by 21 percentage points of organic growth across our HA portfolio and a three percentage point contribution from our P&S products that we recently acquired from Bioness. P&S revenue grew double digits compared to the prior year under Bioness ownership. As Ken mentioned, we continue to capture market share in our Duralane and Jelson products. Compared to the same period two years ago, Duralane revenue has more than doubled in the US and has nearly doubled globally. In bone graft substitutes, revenue was impacted by increased COVID-related hospitalizations that reduced the number of elective procedures. As a result, revenue grew 4%, but is up 35% year to date compared to 2020 due in part to the favorable comparison versus prior year, which saw significant impacts from COVID. We estimate the impact from the disruption during the third quarter of this year be approximately $2 million. Excluding this headwind during the quarter, growth would have been double digits consistent with prior quarters. Conditions have begun to gradually improve over the past month, We currently expect to trend closer to a more normal environment by the end of fourth quarter. Finally, across restorative therapies, we delivered 52% growth. Organic sales growth from our Exogen product was 6 percentage points, while inorganic growth from sales of the Bioness Advanced Rehabilitation Portfolio was 46 percentage points. Growth in advanced rehabilitation compared to prior year increased double digits. Moving down the income statement, adjusted gross margin of 79% was unchanged compared to last year. While we've experienced some increased transportation costs due to global supply chain challenges, we have offset this through improved manufacturing performance as well as a more favorable product mix. Overall, adjusted operating expenses increased $17 million, driven by costs related to Bioness, public company costs, and a return to more normalized spending patterns when compared to the prior year. In addition, given the strong sales in the first half of the year, we are electing to make some additional strategic investments in the second half to further bolster our growth strategy and build out our corporate capabilities. Now, turning your attention to our bottom line financial metrics, adjusted EBITDA totaled $21 million compared to $23 million in the prior year. Lower adjusted EBITDA was a result of higher operating costs I just mentioned partially offset by higher sales volumes. Adjusted operating income of $15 million was unchanged compared to last year. Adjusted net income totaled $14 million compared to $13 million a year ago, and we earned 25 cents of adjusted diluted earnings per share. Moving to the balance sheet and cash flow statements. Our balance sheet is solid and continues to provide us with strategic flexibility as we ended the quarter with $81 million of cash on hand and $177 million of debt outstanding. Our revolving credit facility remained undrawn at the end of the third quarter. When factoring in the close of Misonics, which occurred subsequent to quarter end, debt now stands at $376 million and cash on hand is in excess of $50 million. Operating cash flow represented an inflow of $11 million for the quarter. As Ken highlighted, we exercised our option to purchase CardiHeal with a $50 million deposit and made an additional financial investment during the quarter in Trice Medical. We continued to generate strong and consistent cash flow, which provides us with the capability to quickly de-lever when taking on higher debt levels for short periods of time. Finally, let me review our 2021 guidance, which has been updated to reflect the performance of our business in the third quarter, our fourth quarter expectations, and the closing of Bisonics. We now expect 2021 revenue to be $425 million to $430 million, an increase from our previous guidance of $405 million to $415 million. The increase in revenue guidance contemplates two months of Misonics revenue following the October 29th closing. Our guidance for adjusted EBITDA is unchanged from previous guidance of $77.8 million to $82.0 million. However, the guidance now reflects stronger than anticipated adjusted EBITDA generated from legacy BioVentus and the Bioness acquisition, offset by the inclusion of Misonics into our guidance. In closing, we continue to execute on our growth initiatives across our business. I'm confident in our ability to maintain our top-line momentum while we complete the integration of Bioness in the coming months and begin to integrate Misonics. Operator, please open the line for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kyle Rose from Canaccord. Your line is open.

Great. Good morning, everybody, and thank you for taking the question. So congrats on a strong quarter here. I wanted to see if we could just touch first on the pain and joint preservation section here. I'm just wondering, obviously we saw some surges of the Delta variant, and I realize that that impacted your BGS business, but I'm wondering, Over the course of the last 18 months, particularly in the Q3, have you seen a benefit there in your pain treatment, just as people might be pushing out total joint procedures, they might be getting more injections? Is that a dynamic that you're seeing here, or is it really just solely reimbursement access?

Yeah, Kyle, good to hear from you. I would say what it's created more than anything with the pandemic is more choppiness as we see ebbs and flows of elective procedures that can create choppiness in their use of hyaluronic acid therapy, for instance. But as we've always said, as long as patients feel comfortable going to the doctor's office, and even with the Delta variant, that was the case. It was more the elective procedures that were impacted due to hospitalizations of patients with COVID that we're in good shape with that particular product line. So from our perspective, it's really not reimbursement driven as much. I mean, our reimbursement strategy certainly aids in our market asset strategy more to our market penetration than anything, but it really comes down to access to the physicians. And we certainly did not see that get curtailed at all in the third quarter.

Okay. That's very helpful. And then you talked about some, I guess, early initiatives to help drive the Bioness acquisition. I think you talked about some pilots for using the existing Salesforce for PNS. And I'm just kind of trying to understand maybe when we should expect to see some of those cross-selling synergies really start to play out into this model. I mean, I I understand it's still early days, but maybe just help frame what that cross-telling tailwind should look like in 2022.

Sure, Kyle. I mean, starting with peripheral nerve stimulation, and our focus, as a reminder, is on post-surgical pain. We really view products like the Stem Router, our PNS device that we sell today, as being used in lieu of opioids and prescribing opioids for post-surgical pain control. So that initial pilot has gone quite well for us. There is a dedicated P&S team that we inherited from Bionessa does a fantastic job and works with our team in this pilot to generate leads. We do see that expanding to our more broad sales team in 2022. So we expect to see increased sales synergies, revenue synergies as we go through 2022. Now, on the L300Go, our focus, and this is a pilot that just started, is gait disturbance post total knee procedure. And these are patients that have a weakened quadricep muscle, which is fairly common when you have osteoarthritis and you're rehabilitating from a total knee. Their device, the Bioness L300Go, our device can restore that gait through a series of gyroscopes and stimulation of the muscle. So this initial pilot we're pretty excited about because it allows surgeons to prescribe this and get a patient back to walking normally more quickly than they normally would with the aid of the L300 go. We would expect that pilot to continue here through the end of the year and into the first quarter, but see more significant revenue synergies there as well, probably in more in the second half of 2022. Okay, great.

Thank you for the additional color here.

Thanks, Kyle. Thank you. Your next question comes from the line of Robbie Marcus from JP Morgan. Your line is open.

Hey, guys. This is Alan on for Robbie. Just starting off with, you know, the kind of trends that you're seeing and sort of piggybacking off the question asked previously is that, you know, it seems like you guys are definitely holding in a little bit better than some of your other surgical and orthopedic-exposed peers. And I would guess some of that's based on where you are kind of in the treatment paradigm. But can you just talk about why that might be the case in your own view, why you're holding up a little bit better in light of COVID-19 trends in third quarter, why you have so much more confidence in kind of this normalization over the course of 4Q when we're hearing some other peers talk about an extension maybe even into 2022?

Yeah, great question, Alan. And look, it starts and ends with our team and our people. We have a resilient, dedicated group at BioVentus. And that goes across our business from our sales team to everyone that supports our sales efforts. That dedication, coupled with our strategy, translates into what you're seeing today. Now to peel that back a little further, if we start with our joint pain treatments, our HA products itself, That is normally a first line of defense. And as we've talked about, as long as patients feel comfortable going to the doctor's office for treatment, we're in good shape with that therapy. We have excellent reimbursement. We're the only company with a single three and five injection. We've certainly seen the single injection through the pandemic continue to accelerate in usage. And we think with our Duralane product, which is the highest molecular weight HA product on the market today, we'll continue to see penetration of market share with that product. The product is that good. And with Gelson, our three injection, which is still a small overall, relatively small percentage of the three injection market, we expect to see continued market share gains there as well. When you look at our other products, we are very diversified and broad. You know, we cut across a large swath of orthopedics. We deal with thousands of orthopedic surgeons on a monthly basis, and that really lends that diversity to the balance and the growth that you consistently see from BioVentus. You know, even with advanced rehabilitation, we have seen terrific things from the Bioness team in that area where their call point is largely post-stroke patients and With the gait restoration device I mentioned, the pilot, the L300 Go, and that's been a huge success this year. You know, we continue to see good things from Exogen, and even with the headwinds with bone graft substitutes, we saw 4% growth when large areas of the country where we're highly penetrated curtailed elective procedures. And once again, that goes down in bone graft substitutes to our strategy of being agnostic to spinal hardware. being able to work with every spine surgeon, no matter what spinal implant they use, and be able to offer a superior product in a very dedicated sales team that sells that product. So at the end of the day, as I started out, it comes down to our people, it comes down to our culture, and certainly the ability to execute that type of strategy in a very diversified setting that we have.

Got it. And then I guess just as a quick follow-up, you know, when I look at kind of the Misonics portfolio, it does look like, correct me if I'm wrong, maybe a bit more, you know, interventional in nature. So how has that portfolio really held up? I would say that your updated guidance is roughly in line with what we were contemplating for Misonics, but just in terms of the recovery trends for that business and whether or not that's influencing your decision to, you know, start the integration kind of a quarter late after close. Thank you very much.

Yeah, Alan, you know, it's continued to hold up. I would say like a lot of elective procedure-based technologies, it's had some headwinds in certain parts of the country, like we saw with our bone graft substitutes, but that's balanced by their wound business, which is less related to elective procedures, you know, so they're a balanced portfolio as well, having a A foot in both elective surgical procedures and spine largely and then wound treatments as well. So that team has continued to execute and grow that business. So we're pretty, pretty excited about that. And once again, see tremendous synergies there with our combination in bone graft substitutes. Both technologies, the bone scalpel as well as our bone graft substitutes being agnostic to spinal hardware, we see the ability to execute with a combined sales team and penetrate the market more quickly than we are, than both companies are doing solo today. And then with the wound products, we'll continue to sell to the wound centers and the hospitals, but add in our office call point there as we go forward with the wound products, where a lot of wounds with the pandemic are being treated in the office, which offers a great opportunity for expansion of their wound business.

And our next question comes from the line of Robbie Marcus with J.P. Morgan. Our next question comes from the line of Drew L. Ranieri with Morgan Stanley.

Hi, thanks for taking the questions. And I'm sorry if I missed this, but just with Bioness now in the bag, Masonics has closed. How are you thinking longer term about the growth profile of BioVentus and the margin profile going forward?

Yeah, look, when we look at opportunities like this, Drew, and thanks for the question, number one, it has to drive accretive growth, and our goals are consistent double-digit growth in our business, and certainly we look at both Bioness and Misonics as technologies that have a lot of that growth profile left in them to drive that consistent double-digit growth that is accretive to BioVentus. As far as the margin profile, largely those are in line with what we've done historically. We certainly look at that very carefully when we do any M&A and understand what the margins are. what increased volume can do to impact margins, and certainly what reimbursement looks like as well, and what that can look like in our hands margin-wise as we move forward. So both of those areas, accretive growth and margin, are critical components, and certainly Bioness and Misonics check both those boxes for us.

And then just on international, I know that it's only roughly 10% of total sales, but growth continues to be strong heading out of international. But can you talk more about some of your initiatives? Again, since you've added to the portfolio, maybe go into a little bit more detail about your go-to-market strategy. And can you put any framework in place of strategies where international could be in the next 12 to 24 months as a percent to your total sales?

Well, as we mentioned, Drew, today it's about 10% of our revenue, and that's below average compared to our peers. And certainly that's something we think with a broader portfolio with Bioness and now Misonics we can leverage. We are direct sales organizations in Canada, the U.K., and Germany. and a terrific international office in Amsterdam. And we think we can leverage those qualities, those attributes, that infrastructure that we have to grow international, hopefully at a faster clip than our double digit growth. And we do see that happening over the course, not just the next 12 to 18 months, but certainly over the coming three, four or five years. And I would see international, I'm not gonna put a prediction out there on the percent of revenue, but I would see it certainly climbing above the 10% that it is today. We see that kind of opportunity, keeping in mind that both Bioness and Misonics did not have direct selling organizations, went through largely distributors. So the combination of our direct organizations, our international infrastructure will allow us, we think, to continue to penetrate markets more fully than both Bioness and Misonix were able to. So that certainly will lead to enhanced growth, growth that will probably be above what the total company growth will be. So we're pretty excited about that. We also see the APAC region of the world as another opportunity for us. And we'll be looking at that more closely as we go forward and taking advantage of opportunities there as they come forward.

And then just one last question, just on Duralane for a moment. You called out it's the highest molecular weight, and I think coming out of AAOS, there was maybe some positive podium presentations or discussion about high molecular weight HA, but what's been the feedback from clinicians after hearing that data? Are you seeing that in the field? Thank you.

Yeah, Drew, it's a net positive. You know, the AAOS comments on HA coming out of the meeting in September were an improvement, we feel, and I think others would agree, over the somewhat tepid attitude towards HA back when they last reviewed this in 2013. Now, despite that, the HA business overall has continued to grow at 3% to 5%. But the fact that Duralane is the highest molecular weight, and they certainly correlated strong clinical results with high molecular weight HA. Of course, Duralane was not called out. But we know, based on our data, that is the highest molecular weight. And this is peer-reviewed data. We feel very good about that position. We feel very good about Duralane's ability to continue to penetrate the single injection HA market. Keeping in mind, it's only been on the market for four years today. It's about 20% of the single injection market, and we think we can double that share over the coming years. If we use two parts as kind of a predicate for that, which has 40% of the five injection market, we think we can get there with Duralane in the years to come, and we're very excited about that and certainly the impact it has on patients' and their osteoarthritis pain, which continues to be a growing demographic trend.

I'm shown no further questions. So with that, I'll turn the call back over to CEO Ken Reilly for any closing remarks.

Thank you. Thank you all for your continued interest in BioVentus. While we continue to execute well in this uncertain environment, we remain committed to creating shareholder value. I am confident in our growth strategy and in the ability of our diversified market-leading portfolio to sustain double-digit organic growth while successfully integrating our recent acquisitions. Have a great day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.