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spk10: Good day and welcome to BioVentus Incorporated third quarter 2022 earnings conference call. All participants will be in a 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 star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead.
spk05: Thank you. Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the BioVentus 2022 Third Quarter Earnings Conference Call. With me this morning are Ken Riali, CEO, and Mark Singleton, Senior Vice President and CFO. Ken will begin his remarks with a review of the third quarter and an update on our progress on our 2022 priorities. Mark will then provide further detail on our third quarter results and updated four-year guidance. We will finish the call with Q&A. The presentation for today's call is available in the investor section of our website, bioventus.com. Before I 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 risk factors for the company's form 10K for the year ended December 31st, 2021, as well as our most recent 10Q filed with the Securities and Exchange Commission. Your caution not to place undue reliance upon any forward-looking statements which speak only as the date they were 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 U.S. generally accepted accounting principles for GAAP. We generally refer to these as non-GAAP or adjusted 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 fioventus.com. Now I'll turn the call over to Ken.
spk06: Thanks, Dave, and good morning, everyone, and thank you for your continued interest in BioVentus. As we finish the year, we continue to build a foundation for sustainable long-term growth. Earlier in the year, we successfully completed the integration of biomass. In addition, we are on schedule with the integrations of Misonics and the recently completed acquisition of CartiHeal, which provides us with a transformational long-term opportunity to accelerate growth. With the Misonics integration, we are on target to achieve our goal of $20 million in synergies by the end of 2023. We are focused on improving our execution and internal processes to make us more efficient and strengthening our long-term outlook. And we are proud of the way our global team continues to strive toward achieving our goals. Our financial results for the quarter fell below our expectations, and we are updating our full-year revenue and financial guidance to reflect these results and the expected impacts to our business during the fourth quarter. For the third quarter, revenue increased 26% to $137 million. Organic growth was 7%, and after adjusting for exchange rate impacts, constant currency organic growth was 8%. Adjusted EBITDA of $23 million for the quarter was the result of lower than expected revenue, as well as temporary impacts on our adjusted gross margin, which Mark will discuss in more detail. Our revenue shortfall in the quarter can primarily be attributed to transitory headwinds related to Gelson, our three-injection HA therapy. as well as changes in customer buying patterns near the end of the quarter due to reimbursement changes announced by Medicare that resulted in greater than expected volatility across our entire HA portfolio. We faced two primary headwinds specific to Jelson. The first of these was higher than normal rebate claims due to unexpected prior period rebate charges from a private payer who found errors in their earlier claims reporting. We are working with this private payer on their reporting of rebate claims in an effort to avoid future volatility. The second impact in the HA market was related to the recent change in pricing to average selling price, or ASP, from wholesale acquisition cost, or WAC. Importantly, as I mentioned last quarter, We have successfully negotiated a decrease in the amount of the rebates to be paid on our preferred payer contracts. This change took effect at the start of the quarter and is now offsetting some of the deduction in selling price due to the change to ASP. However, we experienced volatility due to the change to ASP that was beyond our expectations during the quarter. as Jelson's sales volume shifted during the quarter in more price-sensitive or non-contracted accounts as market pricing disadvantages arose. While we expect to see continued pressure on Jelson revenue through the first half of 2023, we believe that the mechanics of ASP reporting will resolve this issue as full ASP reporting takes effect and Jelson pricing stabilizes to a more competitive position. As a reminder, ASP reporting is based on a four-quarter look back. While both Jelson and Duralane moved from WAC to ASP pricing, this dynamic did not impact Duralane, which maintains strong double-digit growth for the quarter. Duralane possesses the highest molecular weight of any HA product, and that clinical differentiation coupled with our market access strategy continues to resonate with customers as we further increased our market share in single injection HA therapy, which is the fastest growing segment of the HA market. In addition to these factors impacting Jelson, we also experienced some volatility across our broader HA portfolio at the end of the quarter as customers delayed purchases while they awaited potentially lower pricing resulting from the quarterly reset in our ASP, which happens at the middle of the last month of the quarter. We expect decreasing impact from the ASP shift as quarter to quarter pricing changes become less volatile over the next few quarters. Despite these near-term challenges, we continue to take overall HA market share in the quarter. And we are confident we can build on our number two market share position. We believe we are on track to become the market leader across our HA portfolio, given four distinct factors that position us favorably against our competition. Number one, our market access strategy with our exclusive and preferred payer contracts. Number two, our complete portfolio of one, three, and five injection therapies is unique among our competition. Number three, Duralane possesses the highest molecular weight of any HA product on the market, providing it with longer residence time in the knee and clinical differentiation in the single injection space, the fastest growing category in the HA market. And number four, we have the largest sales force focused on the specific customer base prescribing HA therapy. While we are disappointed that total company organic growth was below our double-digit target, we achieved high single-digit organic growth driven by strong results and execution across our restorative therapies and surgical solutions verticals. Within surgical solutions, we delivered strong double-digit organic growth as we continue to see a steady recovery in elective procedures as hospital staffing issues improved. OsteoAMP Flowable, our injectable allograft bone graft substitute solution, continues to grow rapidly following its introduction last year. We have also fully launched bone scapula access in early Q4, and combined with OsteoAMP Flowable, we now offer a complete portfolio in minimally invasive spinal fusion, the fastest growing area in spine. Additionally, Mystonix continues to grow double digits in the US on a pro forma basis. Last month, we put our full surgical solutions portfolio on display at the North American Spine Society Conference. We were encouraged by the reception our hardware agnostic portfolio received from spine surgeons. Our sales and marketing team had many positive conversations with attendees about the clinical and economic value that our combined portfolio can bring to their spinal fusion and decompression procedures, as well as the economic benefit our products can bring to their hospitals. Within restorative therapies, we delivered high single-digit organic growth driven by the recovery in our advanced rehabilitation portfolio following the previous quarter's supply chain disruptions. Unfortunately, in the past week, we were informed by our contract manufacturer that supply chain headwinds have arisen again for key portions of our advanced rehabilitation portfolio, which has reduced our expected revenue for the fourth quarter. The improved performance of advanced rehabilitation during the quarter was partially offset by a slower than expected recovery in Exogen, which we anticipate will remain a headwind for the rest of this year. Exogen underwent significant changes earlier this year to our internal processes as well as a realignment of our sales force to improve overall sales effectiveness. While this has caused some disruption throughout the year and contributed to the shortfall against our original full-year revenue expectations, we are seeing tangible evidence of a sales force that is gaining effectiveness and rapport with their accounts. We are also driving steady reductions in the time required for us to process orders through the payer. As we continue to improve our processes and our reps gain greater effectiveness, we are building momentum and expect to see a positive inflection in the coming quarters. Finally, our international segment grew 27% on a reported basis, driven by our MySonics acquisition. Constant currency organic growth was 5%, primarily driven by continued strength in Duralane. As discussed on our second quarter earnings call, we continue to see MDR-related regulatory headwinds in our advanced rehabilitation portfolio in the third quarter. Despite productive conversations with our EU-notified body indicating no outstanding issues in our final submission for the MDR CE mark, we have not yet received formal approval. Therefore, we now believe this headwind will continue through the fourth quarter. Reflecting on the significant and strategic changes over the past 20 months, BioVentis has invested in multiple growth drivers to diversify a business that has been historically concentrated in HA and exogen. Many of these new growth drivers are now coming to fruition. and will be critical for us to execute as we move forward. The value of these investments is evident when looking at the combined double-digit growth achieved across the Bioness and Mystonix businesses we acquired last year. These investments have nearly quadrupled our total addressable market to roughly $16 billion, providing us with a pathway for accelerated growth across the short, medium, and long term. Additionally, products launched within the last few years, such as Duralane and OsteoAmp, continue to gain market share and grow double digits. Today, 40% of our legacy BioVentus product revenue comes from products launched since 2018, demonstrating a significant track record of innovation, as well as successful product launches and commercialization. While we expect to fall short of our goal of double-digit organic revenue growth this year, the BioVentis team remains highly focused on improving our execution, internal processes, and operational efficiencies. Turning to our recent acquisitions, we continue to make good progress on the integration of Misonics, and successfully completed the first phase of our IT transition at the end of August. Over the course of the next 12 months, we will complete our systems integration and move manufacturing of MySonics products from Farmingdale, New York, to our facility in Memphis. We remain on track to complete the integration of MySonics by the end of 2023. During the quarter, we also kicked off the integration of CartiHeal, and we began to execute on our launch plans. We are excited for the first case in the U.S., which we expect to be completed in Q4, and we anticipate the first cases in Europe will take place in the first half of next year. As we've discussed in the past, we are taking a measured approach to our initial launch strategy in order to ensure that all surgeons receive mandatory cadaveric training and understand both the clinical utility of the implant and the reimbursement mechanics. We believe that this methodical approach will lead to broader private payer coverage and facilitate successful adoption of the product. As a reminder, CARTIC-HEAL gives us a significantly differentiated treatment in the high growth market of cartilage replacement with a total addressable market size of $2.6 billion. As discussed on prior earnings calls, given the increase in debt to finance the CardiHeal transaction and future milestone payments, we are pausing on further M&A. Additionally, we have begun a thorough review of our spending with the recognition that we need to carefully manage our resources and discretionary spending. Also, in order to drive optimal efficiency and set the company up for sustainable long-term growth, we reorganized into three business units during the third quarter that are centered around our revenue-based, customer-focused verticals. These business units consist of pain treatments and restorative therapies, surgical solutions, and international. BioVentus has consistently focused on internal talent development. And as we have made this transition, we promoted three leaders from within each business to newly created general manager roles while simultaneously eliminating the chief commercial officer role. I am excited for my colleagues that have received these promotions and look forward to their success as we continue to execute our growth strategy. In conclusion, BioVentis has made a significant transformation since going public about 20 months ago. We created a more diversified portfolio that has driven high single digit above market growth in a medical device business of significant size and scale, all while successfully integrating three acquisitions. Our expertise and success in commercializing new technologically advanced medical devices and our ability to gain market share with our best in class commercial channels are key strengths that bode well for our future product launches that are in our pipeline. Our larger scale has been meaningful, particularly when faced with the volatility of the temporary pricing shift with Jelson and our softer than expected Exogen performance. Importantly, we view our headwinds as temporary and not impactful to our long-term goals. We are excited about the multiple growth levers and market opportunities across our businesses and believe that there are significant opportunities to gain share in large and growing markets. We remain confident in our ability to deliver cost synergies from our acquisitions and improve our overall expense profile across the business, as well as enhance our growth and margin profiles by leveraging our leading medical devices, scale, and commercial infrastructure. Now I'll turn the call over to Mark.
spk04: Thanks, Ken. And good morning, everyone. Let me begin with a review of our third quarter results. Revenue of $137 million increased 26% compared to the prior year. We saw a 7 percentage point increase from organic revenue along with a 19 percentage point increase related to our acquisition of Misonics. Lower sales and gross margin headwinds also impacted our earnings as we generated adjusted EBITDA of $23 million and adjusted diluted earnings per share of $0.08. Across pain treatments, sales were flat compared to prior year, as double-digit growth in Duralane was offset by a double-digit decline in Jelson. In surgical solutions, we grew 94%. We saw 32 percentage points of organic growth across our bone graft substitutes, representing back-to-back quarters of double-digit growth as the market normalizes from recent hospital staffing issues. The third quarter included a 62 percentage point contribution from Misonic's surgical portfolio. Finally, restorative therapies delivered 38% growth. Revenue from Misonic's wound products contributed 31 percentage points. Organic growth of 8 percentage points was enhanced from the recovery in our advanced rehabilitation portfolio from supply chain challenges. seen in prior quarter and offset by a slower than expected recovery in exigent. The return of supply chain headwinds and advanced rehabilitation along with the delayed receipt of EU MDR certification will hinder our organic growth in the fourth quarter. Moving down the income statement, adjusted gross margin of 75% was down 350 basis points compared to the prior year and was driven by three factors. First, we had unfavorable product mix due to the strong recovery of our lower margin advanced rehabilitation products combined with lower sales of Exogen, which is a higher margin product. Additionally, the impact of our Misonics acquisition also negatively impacted our sales mix during the quarter. Second, we were impacted by the unexpected prior period rebate claim related to Jelson, which Ken discussed earlier. And third, we incurred higher freight costs throughout the quarter. Overall, adjusted operating expenses increased $15 million primarily by costs related to Misonics when compared to the prior year. Now turning to our bottom line financial metrics, adjusted EBITDA totaled $23 million compared to $21 million in the prior year. Increased revenue was offset primarily by higher operating costs related to our acquisition of Misonics and lower gross margin as discussed a moment ago. Adjusted operating income increased to $18 million from $16 million in the prior year. Adjusted net income totaled $6 million compared to $11 million a year ago due to higher interest expense, and we earned 8 cents of adjusted earnings per share. Now turning to the balance sheet and cash flow statement. We ended the quarter with $34 million of cash on hand and $424 million of debt outstanding. our revolving credit facility remained undrawn at the end of third quarter. Operating cash flow represented an outflow of $1 million for the quarter as we saw increased working capital. We expect operating cash flow to accelerate in the final quarter of the year as EBITDA increases and we see improvement in working capital. Finally, let me provide an update to our 2022 guidance. We now expect 2022 revenue to be in the range of $527 million to $532 million compared to our previously issued guidance of $547.5 million to $562.5 million, representing a $25.5 million reduction in revenue at the midpoint. Our updated guidance primarily reflects three changes in our outlook. First, we expect Jelson sales to continue to be impacted by the shift in sales volume related to the transition from WAC to ASP acquisition costs. This represents approximately a quarter of the reduction to our revenue guidance. And while we expect Jelson pricing to continue to be a headwind through the first half of next year, we expect pricing to become more favorable in the second half of 2023. Second, we expect to see Exogen sales recover more slowly than previously expected as we regain our sales momentum following the realignment of our sales force and operational challenges changes earlier this year. This represents slightly less than half of the reduction to our revenue guidance. And lastly, we expect lower revenue from our advanced rehabilitation portfolio due to supply chain headwinds and delayed EU MDR approval representing approximately a quarter of the reduction to our revenue guidance. With the reduction in our revenue guidance, pressure related to gross margin and slower reduction in planned spending due to prioritization of initiatives, we are lowering our adjusted EBITDA guidance. Adjusted EBITDA is now expected to be in the range of $75 million to $79 million, compared to our previously issued guidance of a range of $94 million to $104 million. Corresponding to the reduction in adjusted EBITDA guidance, we are reducing our full-year 2022 adjusted diluted earnings per share guidance to $0.20 to $0.25, compared to our previously issued guidance of a range of $0.47 to $0.57. The updated in our EPS guidance also now takes into account the impact of purchase price accounting for a CardiHeal acquisition that was recently finalized. While we continue to pay interest on the financing at 8% for accounting purposes, we will accrue interest at approximately a 15% rate. As a result, we now expect to recognize higher interest expense related to our seller financed acquisition. In closing, we are focused on bringing increased discipline and rigor to our revenue forecasting and expense management processes. Though we are not satisfied with our results, we are confident in our ability to drive revenue growth and expand our margins as we deliver our balance sheet and prepare for future milestone payments related to CAR to HEAL. Operator, please open the line for questions.
spk10: We will now begin the question and answer session. To ask a question, you may press star and 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.
spk09: At this time, we will pause momentarily to assemble our rosters. The first question today comes from Alex Nowak with Greg Allen Capital Group.
spk10: Please go ahead.
spk03: Good morning, everyone. This is Chase for Alex. So, Ken, starting out from us, on the AHA piece, it looks like revenues were down about 13% sequentially for pain, while we have volumes up for Duraline. So, you gave some helpful color there, but can you go more in-depth for us a bit around Jelson versus Duraline impact? Was all this a sequential revenue decline Jelson, or did you see any top-line impact on Duraline as well that diluted those volume increases you're seeing? And then is pricing actually helping you, you know, take share with Duralane? Because, I mean, we saw a pretty nice increase in Q3. Thanks.
spk06: Yeah, thanks for your question on that. So the HA market is really three distinct markets is the best way to think about that. We have the single injection market, Duralane, where we continue to grow double digits and take market share and under favorable pricing conditions as well. Duralane also is a factor where it's the highest molecular weight. with the strongest clinical data on the market. So it gives us distinct product feature advantages as well. Jelson is in the three injection market, and that is more of a commodity market today that is much more price sensitive. And with the shift from WAC to ASP, it put Jelson in a position where it was not as price competitive over the third quarter. As mentioned on the call, we expect this to right itself. This is a temporary phase. And by the second half of next year, our pricing will be more competitive with Jelson. And we expect to regain any market share that we lost in the three injection. And then Sue Parts is our five injection. And that did not go through a pricing change from WAC to ASP. That was already ASP reported. But all told, we continue to gain market share in our single injection product. lost a little bit on three injection and continue to go well with the five injection. And as I mentioned, we continue to gain overall market share in the HA market. As you pointed out, we've had significant gains in volume, and we expect that to continue and continue to move forward from our number two position to hopefully be the market leader here in the quarters to come.
spk03: Thanks, Ken. That's helpful there. I guess helping us understand a little bit more around the bridge to double-digit organic growth would be helpful as well. Is this, on the pain side, is this something we should expect to be, you know, similarly year over year impacting the pain business, you know, until, you know, three-quarters from now when everything kind of stabilizes for Jelson or kind of walk us through the bridge to overall organic, you know, double-digit growth there with, you know, obviously strength and and surgical and restorative is good to see. But I guess the bridge there would be helpful to kind of hear you talk about.
spk06: Sure. And I'll emphasize that we continue to see strong double-digit growth in big areas of our business. As you pointed out, Surgical Solutions had an outstanding quarter. Advanced Rehabilitation had an outstanding quarter. You know, the biggest impact we had was in pain. And we see that headwind, although temporary, continuing until the midpoint of next year at the midpoint of next year gelson in particular will be in a better position pricing wise the year-over-year comps will be favorable uh as we shifted from whack to asp on july 1st so we expect that to kick in uh you know we'll continue to see double-digit growth in certain aspects of our business but certainly the pain area We don't anticipate that until we get beyond this current situation with Jelson.
spk03: And then just last for me, just from a modeling perspective, it's a little bit helpful to understand the mix between the top line impact on Jelson between the volume decline and then that rebate issue. So any more additional color there would be great.
spk04: Yeah, I think, you know, when you just look overall at our EBITDA guidance, you know, coming down, I think, you know, two-thirds to three-quarters of that is due to the revenue drop in total. When you look at gross margin perspective, we have, you know, some headwinds and freight that we incurred in the third quarter that we expect to continue to see the full impact of that. In fourth quarter, we had some of our product costs come in higher in 3Q that we would continue to see in 4Q. We did mention in our script about higher rebates that we saw in third quarter. And while those should improve in fourth quarter, we do expect to have a higher run rate that we will be accruing to for our private payers. So that was kind of an impact on our margin in third quarter. From a third quarter to fourth quarter perspective or third quarter perspective, we also had some savings identified that didn't materialize. I guess one example that I would give on that was higher bad debt. which is really related to our integration of Misonics and Bioness. We expect to be seeing improvement on that as we, you know, one thing we did accomplish in third quarter is the integration of our ERP systems and bringing those acquisitions onto our BioVentus ERP system, which gives us more visibility into the customer's you know, contact information and more efficiencies within the organization to collect accounts receivable. So we're working that and, you know, expect to see some improvement in that in fourth quarter. But that was an impact for us in 3Q.
spk03: Okay. Thanks for the question, Seth. I'll hop back in queue. Thank you.
spk10: The next question comes from Kyle Rose with Canaccord Genuity. Please go ahead.
spk08: Hi, this is Caitlin on for Kyle. Just a quick question on advanced rehab. So given these supply issues have returned, how long do you see these issues lasting? And do you anticipate that any supply issues in any other area of your business will arise?
spk06: Yeah, good question there. As we talked about, this is one specific product in advanced rehabilitation. And just to characterize it, it's a capital equipment piece And the order book is very solid. And certainly, these aren't lost sales just because we have a supply chain issue. It's temporary. We do expect it to get resolved by next year and expect to start shipping units again in the first quarter as we move forward. So at this point in time, that's how we're looking at it. As far as the rest of the business, we've been fortunate. The supply chain issues we've had this year have been really relegated to this specific product. And as I mentioned, it's capital equipment. The orders do not go away. This is a unique device, and we'll be able to capture that revenue as a supply chain issues lesson.
spk07: Gotcha. And then on CartiHeal, can you just walk us through the expected ramp on the product and when we can expect meaningful revenue contribution?
spk06: Sure. And first of all, I'd say I was able to see a couple of CartiHeal cases in the quarter, and we are extremely excited about this technology. It's a perfect outpatient procedure and cartilage replacement, and it's a perfect fit with BioVentus and with our sales team that calls on sports medicine surgeons today with our HA product. We are going to start cases here in the U.S. later this quarter. and go through a process where each surgeon is going to have to be trained via a cadaveric lab. And then we walk through the reimbursement steps. And what's important is CardiHeal has a Category 3 code today that will be crosswalked to an existing Category 1 code for reimbursement and payment. Our goal is to do a methodical approach in building our business with CardiHeal. We do not expect meaningful revenue in 2023, but over the next year, we should be able to provide better guidance on the trajectory of growth in the future years to come. But we're very excited about this. It's been a terrific start. The team's done a terrific job in bringing on board the key opinion leaders that are going to do the initial cases in the United States. And certainly, we look to start cases in Europe in the first half of next year. So all of that is in place and moving forward very nicely.
spk09: Awesome. Thank you so much. The next question comes from Drew Ranieri with Morgan Stanley.
spk10: Please go ahead.
spk12: Hi, everyone. Just, Ken, maybe to start, as you're looking at these issues, and I get that some of these are transitory, What's giving you really the confidence on the visibility to maybe label some of these as transitory? And maybe specifically with the HA side, you talked about being like kind of mid-next year until these kind of resolve. But again, kind of what gives you that confidence, that level of confidence, and that there's not broader implications for the other parts of the HA portfolio to come?
spk06: Yeah, great question, Drew. So we model this out and we have a full understanding of where our pricing is going to go over the next year with all three HA products, Duralane, Gelson, as well as Suparts. So if you look at it that way, we have a really good understanding of that as well as the market dynamics. And we can pinpoint based on the look back, keep in mind that this HA WAC to ASP pricing change is really a four-quarter look back. So when we look back right now, we have the WAC pricing, the wholesale acquisition costs involved in our ASP calculation. By July 1st of next year, that will have gone away, and that will put Jelson in a much more favorable pricing dynamic than what it is today, where it's a combination of WAC and ASP. So we're able to confidently look at that. We certainly know the competition. We know the markets, and we know where the pricing is going to be. And we're confident it's going to be transitory in that respect. So that's Jelson. Duralane is a very different story. And as articulated, we continue to grow double digits there. Keep in mind, Duralane was just launched in 2018. It's early in its product lifecycle. It has the highest molecular weight out of any HA product. And we see ourselves continue to gain market share with Duralane. We know where the pricing is going relative to ASP. And we've got a firm handle on our ability to continue to grow. You know, lastly, I would mention our preferred and exclusive contracting with payers makes a big difference here with both Duralane and Jelson for that matter. With Duralane, we continue to have exclusive contracts with United and Cigna. And that drives significant entree into many new accounts. And then with Jelson, we are one of two. We are a preferred payer contract. contracts with both United and Cigna, which also helps us with Jelson maintain our presence in key accounts. And obviously, as the pricing transitions, we expect to get back some of the lost accounts or business that we're not getting today.
spk12: Got it. Thanks for the detail. And you sort of talked about this a little bit earlier, but As you're thinking about confidence in growth and driving margin expansions as you're deleveraging, how should we think about that for 2023? I know you don't necessarily want to provide guidance, but this is a significant guidance reduction that we're seeing today. There are some incremental challenges as we're heading into next year, but how are you thinking about the business, maybe X, Exogen, Jelson, and kind of this advanced rehab product as you're kind of thinking about 2023 growth?
spk06: Sure, and I can talk about it qualitatively, Drew, in terms of all the tailwinds we see in 2023. And we obviously built this business over the past 20 months with a long-term view of driving growth. And when we look at it, obviously, we're a one-year post-integration of Mystonics, and we see significant growth and opportunity in surgical solutions that includes the bone scaffold as well as the bone graft substitutes. As our direct sales force that we inherited from Misonics with the acquisition continues to gain traction with bone graft substitutes, we see that as a big inflection point and expansion opportunity, keeping in mind that we only have 5% of that market today. We are going to be launching the Sonistar Elite in 2023 as well. And obviously, as we talked about in the quarter, the bone scapula access with minimally invasive spinal fusions will be fully launched through the course of 2023. We are also launching in this quarter a new version of Exogen that is in patient encouragement software that ensures better compliance and better visibility of patient compliance with Exogen that we've gotten great feedback on from surgeons. So that's in the launch mode now, and that will impact all of 2023. As mentioned, we do see ourselves regaining traction with Jelson by the second half of next year. And we view the rehab business regaining our supply chain issues, resolving those in the early part of 2023, and having that product in place through the course of all of next year. And we do see ourselves resolving the MDR issue mentioned on the call and being able to ship the L300 through most of next year as well. And then we continue to see growth in our peripheral nerve stimulation, growth in continued market penetration. And as far as CardiHeal goes, we'll be able to provide further updates as we go through next year and certainly a more significant ramp as we go into 2024. And the last thing I'll mention, Drew, is just on Talisman, which is our next generation peripheral nerve stimulation device, which we expect to have 510K cleared by the end of next year as well. So those are all qualitative tailwinds that we'll talk about as we think about 2023 and discuss that on our Q4 earnings call in March.
spk01: Thanks for taking the questions.
spk09: As a reminder, if you would like to ask a question, please press star then 1 to be joined into the question queue. The next question comes from Amit Hazan with Goldman Sachs. Please go ahead.
spk02: Good morning. This is Phil on for the team. Thanks for taking the questions. I'm going to keep following along the same general lines that we've heard already. So the first one on the Jelson side, I think maybe asking the question slightly differently, wondering what was sort of different or incremental versus what your expectations were internally that you're seeing sort of occur in the end market. And then the sort of follow on to that line of questioning is, Is Duralene in a premium price position as Jelson, in retrospect, was? Just for our understanding. Thanks.
spk06: Yeah, great question on Jelson. And the one thing we can't anticipate, and we certainly anticipated the pricing in Jelson, but we can't anticipate what competitors do on their pricing. And in this environment, price discipline is extremely important, meaning that that you can't reduce your price to try to get business because that impacts your long-term ASP, as you can imagine with a four-quarter look back. But we've had some competition that has done that deliberately to get business. It's obviously a short-sighted lever for growth, and it doesn't lead to long-term maintenance of market share. So that's the situation we found ourselves in with Jelson, and that's a competitive dynamic that certainly we could not predict because it's not a logical approach to the market when you're looking at trying to maintain price and value over the long term. Regarding Duralane, a very different pricing position with Duralane, and it's not as price sensitive of a market. As I mentioned, the three injection market is much more of a commodity market and much more price sensitive. The single injection market with products like Duralane is a premium product With the highest molecular weight, it has product characteristics that are unique in a single injection product. Once again, this is the fastest growing area of the HA market is the single injection area. So it puts us in a very nice position. It's why we're continuing to gain market share in the HA market overall in this environment because of a product like Duraline.
spk02: That's great. That was really helpful. Thank you. Follow-up question. I believe, Mark, in your prepared commentary, you characterized roughly one-quarter of the guidance reduction as attributable to the Gelson shortcoming shortfall. So it's another question along the lines of durability of the other headwinds. It sounded like the supply-related issues on the advanced rehab side, you expect to sort of be a catch-up in 2023 once resolved, and then Sort of what are you looking for in the Exogen end market outside of what you're doing with the product release to see a reacceleration in that business? Thanks.
spk06: Yeah, let me speak to Exogen there on your question. And we are laser focused on Exogen today. And here's what we're doing with Exogen. First of all, as we mentioned, we had a Salesforce reorganization earlier this year to really put more focus on specific specialties. Sports medicine with our HA business and eventual car to heal, key area for us, and then lower extremity with our exogen reps, our exogen reps who also picked up our wound products and selling those in the office. We also put in place direct sales management, and that's effective as of late August. Earlier, we had sales management that really encompassed managing both the HA as well as the exogen areas of our business, but made a decision earlier in the quarter to put this in place and provide more direct focus on the exogen business. So that just happened. We also are improving our processes and most of the exogen orders today as of mid third quarter, are processed within 72 hours. And this is a drastic improvement. It's an improvement in customer service and certainly gets the unit to a patient quicker, a patient in need. As I mentioned, we're also launching this quarter the patient encouragement software, which we feel is going to allow surgeons to track compliance better. This was a key wish and factor that surgeons look to when they want to understand if a patient is using the device and using it effectively. in a compliant way. So this is just being launched right now. And the last thing I'll mention that we've really brought to fore here is an omni-channel approach with Exogen, which offers a broader reach with an inside sales team that is less expensive, but is able to reach areas, more rural areas in the country where we don't necessarily have a sales rep or a direct rep that makes financial sense. So that's where our approach to really Exogen is. And certainly in the early going here of trends, we're optimistic that we're going to reach a positive inflection point here.
spk04: And then just to kind of address, this is Mark, your first part of that question. We talked about Jelson. The other two parts are MDR, our rehab portfolio from an international perspective. We're working through that with the notified bodies. We've been getting positive feedback from them all the way along the process. Our team's been doing a great job of driving that. It's just not all the way through those hurdles. And as Ken kind of mentioned in some of his remarks earlier, you know, we don't expect, you know, we expect the demand because of this unique product to still be there once this MDR gets approved and cleared and we have, you know, the inventory to deliver that. And hopefully, you know, we'll be successful, but we don't expect that to go away. So if it doesn't happen this year, we'd expect that to roll into 2023. The second challenge we had in our advanced rehabilitation portfolio, is also supply chain related. So the first one is MBR, the second one is supply chain related, where we didn't have, you know, actually parts from our supply from our vendor. And this is related to a unique component, so it's separate from the international opportunity. But we would expect that demand to be there as well for this product. We're pretty unique in that market, and there's not a lot of competition. So once the supply chain is and we'll be able to ship that product accordingly. But right now, we don't have enough confidence to put that into our numbers.
spk06: And just one other comment on MDR. I think it's important to recognize, as mentioned on the call, there are no outstanding issues relative to us gaining our CE mark. This is a delay, a backlog with the notified body. Unfortunately, with all the products that are going through MDR right now, we've been a little bit of a victim here on that. That's beyond our control, but certainly the team has done a terrific job in addressing all issues related to this. So now we're just in a wait mode and wait and see mode to get the CE mark.
spk01: Thanks for all the additional, Kelly.
spk09: The next question comes from Robbie Marcus with JP Morgan.
spk10: Please go ahead.
spk11: Hi, this is Rohan actually on for Robbie. So I just wanted to touch on kind of the adjusted EPS guidance. It came down pretty significantly relative to the first time guidance you provided last quarter. And obviously without kind of providing formal color on 2023, but with all the moving pieces, could you just elaborate more on some of the drivers here and also how you're thinking about adjusted EPS growth relative to sales and adjusted EBITDA growth moving forward? Thanks.
spk04: Yeah. Yeah. So from an EPS perspective, if you look at that compared to our prior guidance, so when you look at what we achieved in 3Q, then you move into 4Q and kind of look at the full year. First thing is that when we were closing the car to heel deal, we didn't have full visibility to the purchase price accounting from an interest rate perspective. And so now we're accruing to a higher interest rate of 15%. when you look, we're looking at EPS. And then, but the cash payments that we're making are still at 8% on the milestones for Cartagale. So that hasn't changed, but the purchase price accounting has made that worse than before when we issued guidance. When you look sequentially from 3Q to 4Q, our EPS, you know, is coming down, but it's really due to a full quarter of Cartagale interest rate. We had a gain on a swap in 3Q that's not going to repeat in 4Q. That's about $2 million of that that doesn't repeat into 4Q. And, you know, then we have some offsets of that with higher EBITDA moving into 4Q.
spk06: And we do see, as we go forward and we make these two milestone payments on CardiHeal next year, the two $50 million payments, Obviously, interest expense goes down significantly in the latter half of next year, which is going to positively impact EPS.
spk01: Great. Thanks.
spk09: This concludes our question and answer session.
spk10: I would like to turn this conference back over to Ken Reale, CEO, for any closing remarks.
spk06: Great. Thank you, Betsy, and thanks, everyone, for your continued interest in BioVentus. While we have some near-term challenges in our business, we are confident in the revenue and earnings growth opportunities we have created at BioVentus over the past 20 months. We also view these headwinds as temporary and not impactful to our long-term goals. We participate in large growing markets and provide innovative, differentiated products to our patients. In the coming quarters, we look forward to building on our short and midterm growth drivers and expanding margins to create stakeholder value through our enhanced portfolio and synergies from our recent acquisitions. And finally, I would like to thank our global team for their dedication and commitment to our mission of bringing innovations for active healing to patients around the world. Thank you very much.
spk10: The conference has now concluded. Thank you for attending today's presentation.
spk09: You may now disconnect.
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