Bioventus Inc.

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.

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.

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.