Bioventus Inc.

Good morning, and welcome to the BioVentus Incorporated Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press $1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I'll now like to turn the conference over to Dave Crawford. Vice President of Investor Relations, please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the BioVentures 2022 Second Quarter Earnings Conference Call. With me this morning is Ken Reale, CEO, and Mark Singleton, Senior Vice President and CFO. Ken will begin his remarks with a review of the second quarter highlights and his thoughts on the current market environment. He will conclude his remarks with an update on the progress on our 2022 priorities. Mark will then provide further detail on our second quarter results and recent financing for our CardiHeal acquisition before concluding with an update on our full year financial guidance. We will 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 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 SEC, including item 1A risk factors for the company's Form 10-K for the year ended December 31st, 2021, as well as our most recent 10-Q filed with the SEC. You are cautioned not to place undue 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 and 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 GAAP. We generally refer to these as non-GAAP financial measures. Important disclosures about and 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 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 move into the second half of the year, we look to build on the meaningful progress the BioVentus team has made towards accomplishing the goals we laid out in January. A few of our successes to date include closing the financing and acquisition of Cartahiel, completing the integration of Bioness, and materially progressing on the integration of Misonics, and positioning ourselves to achieve double-digit organic growth for the year by leveraging our technology leading medical devices, our significant commercial organization, and improving market access with expanded reimbursement and preferred coverage agreements across our verticals. We are extremely proud of the way that our entire organization continues to drive toward achieving our goals and strengthening our long-term outlook. and we are looking forward to continuing to build on our momentum in the second half of the year. We are pleased to report that throughout the second quarter, we saw a steady recovery across our surgical solutions vertical, which was impacted by the more acute hospital staffing shortages and Omicron-related challenges we faced in the prior quarter. Mark will discuss our guidance shortly but we believe hospital volumes will continue to trend towards a normal environment in the second half of the year. We believe the foundation and diversification of our business and end markets will remain strong despite the increased potential for economic challenges in the coming months. Over half of our product portfolio is sourced to enable fixed gross margins. allowing us to have a strong and consistent gross margin despite the inflationary headwinds impacting the global economy. In addition, in past recessionary environments, we have not experienced significant business interruptions. Still, we are prepared to take the necessary actions to control costs in order to ensure we deliver on our EBITDA and earnings commitments while continuing to support the long-term needs of our business. Moving to our results, revenue increased 28% during the second quarter to $140 million, including organic growth of 8%, which positions us well to achieve double-digit growth for the year. Constant currency growth was 9%, a good performance compared to a solid comp versus 2021. Additionally, we generated strong sequential revenue and adjusted EBITDA growth. While growth was robust across our portfolio, supply chain and regulatory disruptions in our advanced rehabilitation portfolio limited our second quarter growth. Going forward, we expect this revenue to be recognized in the second half and thus do not expect this shift in timing to have an impact on our full year results. Across pain treatments, we saw double digit revenue growth driven by continued market share gains by our single injection Duralane HA therapy and our three injection Jelson HA therapy. As we highlighted on previous earnings calls, reimbursement for HA shifted from wholesale acquisition costs to average selling price at the end of June. Given the sales mix of our HA portfolio, This new pricing dynamic has not fundamentally impacted our overall growth opportunity. As expected, we have been able to lower our reimbursement rebate rates on all of our preferred contracts with private payers, which has offset lower pricing for other areas of our HA business. The modifications to these agreements are consistent with our modeling exercises done over the past several months as we prepared for this new environment. Additionally, we are seeing some potential opportunities to increase our market share where a few competitors are no longer able to utilize pricing as an incentive for physicians to receive a higher reimbursement. As the only company with a portfolio of HA products across single, three, and five injection therapies, we have held the number two share position in the HA market and continue driving toward becoming the market leader over the coming years. Turning to surgical solutions, as I mentioned, our business rebounded from last quarter's macro headwinds with organic growth returning to double digits. We are encouraged by the sequential improvement that we generated throughout the quarter and continue to experience strong momentum thus far in the third quarter. We also saw a similar recovery in our mysonics bone scaffold during the quarter. Restorative therapy revenue generated double digit growth bolstered by the inclusion of our mysonics wound business. As I mentioned earlier, growth was limited in our advanced rehabilitation business due to supply chain issues impacting our domestic business, as well as back orders for international customers as we await regulatory certifications related to the new European Medical Device Regulation, or MDR, process. The domestic supply chain issues have been resolved early in the third quarter and we are back to fulfilling orders and eliminating our back orders. We expect to receive MDR certification in the third quarter so that international revenue will be back online in the fourth quarter. Finally, our international segment grew 26% on a reported basis, driven by our MySonics acquisition, and constant currency growth was 1%, primarily driven by continued strength in Duralink. The regulatory challenges related to our advanced rehabilitation portfolio are expected to continue into the third quarter, but we anticipate recapturing most of this revenue in the fourth quarter. As a result, we expect to see organic growth trend below normal in the third quarter, but then trend above normal in the fourth quarter for our international business. Finally, given the current geographic mix of our business, we do not anticipate the recent movement in foreign exchange rates to have a material impact on our revenue. Our international business continues to be a low, double-digit percentage of our total revenue. Now I'd like to update you on our 2022 priorities. As highlighted earlier, we are off to a great start to the year and remain focused on our execution across our key priorities for 2022. Our first priority is to achieve double digit organic growth for the year through our technology leading medical devices and the continued strong execution of our commercial organization. While we fell just short of that for the quarter, we made significant progress across some of our key growth areas. In pain treatments, we solidified market access for our HA business by reaching a three-year extension on our UnitedHealth contract, where Duralane remains the exclusive single-injection product, and Gelsyn continues to be one of two products for three-injection therapy. In addition, our two-year contract with Cigna which we announced in May for Duralane and Gelson, also became effective at the start of the third quarter. Within surgical solutions, OsteoAmp Flowable, our injectable allograft bone graft substitute solution, continues growing rapidly since its introduction last year. As a great example of the innovation being infused into our portfolio, over the past three years, we have launched several new products including osteo-AMP flowable, which now represents close to 60% of our bone graft substitutes revenue, enabling us to grow our market share. Also in surgical solutions, we received 510K clearance for Sonistar Elite in late July. Sonistar Elite represents the newest handpiece for our Nexus Ultrasonic Surgical Systems platform, And it will deliver best in class and significantly more power, versatility, and control in the removal of hard and soft tissue in multiple surgical specialties, including specifically neurosurgery. This creates a large market expansion opportunity for BioVentus. We plan to commence a limited market release in the fourth quarter. Our second priority is to complete the integrations of our recent acquisitions while delivering on our cost synergy commitments and leveraging our enhanced scale to accelerate revenue growth. We continue to drive progress on that front and we remain on track for the integration of MySonics to be completed next year and to deliver at least $20 million in cost synergies by the end of 2023. Besides the realization of cost synergies, our combined commercial teams continue to leverage our enhanced scale and customer relationships to accelerate sales growth and cross-selling opportunities. Additionally, last week, we gathered all our U.S. direct sales representatives, over 500 reps in total, together for the first time since the acquisitions of Bioness and Misonics. for a summer sales conference. The conference enabled us to further cross-train our sales representatives on the new products in their verticals and hear firsthand from their colleagues on effective sales techniques. We expect this meeting to be a significant springboard to further increase momentum in the second half of the year as we unleash broader cross-selling efforts within our entire sales force. after piloting multiple initiatives earlier this year. Our third and final priority for the year was recently completed with the closing of the acquisition of CardiHeal, which we believe is a revolutionary and game-changing device for multitudes of patients suffering from knee osteoarthritis and osteochondral defects. As a reminder, it received FDA breakthrough device designation in December of 2020 and FDA PMA approval in late March of this year. Cartagheal has significant potential with a $1.3 billion total addressable market. It is also supported by significant clinical data used for PMA approval as evidenced by the robust data generated from its pivotal clinical trial demonstrating superiority to microfracture and debridement procedures. The completed clinical trial is the largest cartilage repair trial undertaken to date, and we expect it will be published in a peer-reviewed medical journal by next year. The addition of CartiHeal complements our joint preservation technologies, and specifically our HA business and customer base, further supporting our growth drivers and helping us deliver on our goal of sustained double-digit revenue growth. Our restructured agreement not only enabled us to finance the acquisition, but also aligns future milestone payments with value creation that unlocks the full potential of CardiHeal. We will continue to compile clinical evidence and expect multiple articles to be submitted for publication and medical journals over the next few years to support reimbursement coverage and coding. In the coming months, as we launch CAR2HEAL, we will work with our surgeon customers to ensure that each case is pre-authorized to build its reimbursement profile. As we progress on the market development plan, we will update you as we achieve the key value-driving milestones for CAR2HEAL. Lastly, given the increase in debt to finance the Car2Heal transaction, including future milestone payments, we intend to pause on future M&A activity until we return to our targeted range of net debt to adjusted EBITDA of three to four times. We expect to achieve this goal by the end of 2023, primarily through EBITDA growth driven by double-digit revenue growth and margin expansion as well as free cash flow generation. In conclusion, we continue to build momentum as we execute on our growth strategy, and we have further bolstered our growth potential with the acquisition of Cartagale. With the acquisition behind us, our second half focus will be on achieving our other priorities and financial commitments for the year. I remain confident we will deliver on cost synergies from our acquisitions and enhance our growth profile by leveraging our technology-leading medical devices, scale, and commercial infrastructure to deliver consistent double-digit growth.