Bioventus Inc.

Good day, and welcome to the BioVentus Incorporated fourth 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. Please go ahead.

Thanks, Betsy, and good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the BioVentus 2022 Fourth Quarter Earnings Conference Call. With me this morning are Ken Reale, CEO, and Mark Singleton, Senior Vice President and CFO. Ken will begin his remarks with an update on our settlement agreement related to Cardiheal and the progress of our work streams to enhance our financial position. Next, he will review the quarter and provide commentary on the recent headwinds to our HA franchise. Mark will then offer further detail on our fourth quarter results. 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 Commission. The SEC, including item 1A risk factors and the company's form 10-K for the year ended December 31st, 2021, as well as our most recent 10-Q and our upcoming form 10-K and other company filings made 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 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 references 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 bioventus.com. And now I'll turn the call over to Ken.

Thanks, Dave. Good morning, everyone, and thank you for your continued interest in BioVentus. Let me begin with an update on our recent actions to address the financial obligations for Cartiheal, as well as the efforts across multiple work streams to enhance our financial position. At the end of February, we announced an agreement with Cartiheal's shareholders to eliminate the entire $350 million of deferred purchase obligations and sales milestone payments. along with a release from all future claims or obligations to the Car2Heal shareholders. In exchange, we agreed to pay $10 million. The agreement also provided us with a 30-day window to evaluate options to sufficiently fund the $215 million of deferred purchase obligations to Car2Heal and retain the business. As we stated in our release announcing this agreement, we would only pursue funding the deferred obligations on an opportunistic basis in which terms were believed to be favorable to our stakeholders. Over the past month, we, together with our investment banking partner, evaluated multiple pathways. In the end, our leadership and board of directors were unable to secure terms that met our criteria for retaining the business. While we are disappointed to move on from Cartahiel, we remained financially disciplined and declined to dilute our existing shareholders to raise the necessary capital. Over the past several months, in conjunction with the effort to fund the Cartahiel obligation, we took action to enhance earnings and improve our balance sheet. First, restructuring our business to reduce costs, Second, diligently prioritizing investment and aggressively managing remaining spending. Third, evaluating the divestiture of non-core assets. And fourth, working with our banking partners to amend our debt agreement to provide covenant relief. In December, we announced a company-wide restructuring designed to simplify our organization and streamline processes while ensuring our actions avoided materially impacting revenue growth. During the first quarter, we completed the restructuring, and we anticipate generating $9 to $10 million in annual savings going forward, with the majority realized this year. Meanwhile, in building our annual plan for 2023, we prioritized investment in key near-term growth drivers for our business. We anticipate a year-over-year incremental investment of a few million dollars as we launch products like Sonistar Elite, Bowen Scapple Access, and L360, and the submission of Talisman, our next-generation peripheral nerve stimulation device for 510 clearance. To help offset these investments, we have curtailed spending in other parts of our organization by reducing marketing, research and development, and G&A. Next, we continue to explore divesting non-core assets and are actively engaged with counterparties around potential transactions. The potential divestitures vary in transaction size and multiple, and the net proceeds would be used to repay debt. The agreement to remove the obligations related to CartiHEAL allows us to remain disciplined in our negotiations and we will not enter into any divestiture where we fail to receive what we believe to be an attractive value. Lastly, we recently reached an agreement with our lenders to provide covenant relief for our debt compliance for the fourth quarter of 2022 and additional covenant flexibility through the first quarter of 2024. Mark will provide you with additional details on this amendment. While we are disappointed in our inability to secure suitable financing for Cartahiel, our current business possesses multiple growth drivers, and eliminating the obligations related to Cartahiel, along with the recent actions we have taken, has significantly enhanced our financial position. Now let me turn to our fourth quarter results. For the fourth quarter, revenue of $126 million was down 4% compared to the same period a year ago. Our revenue and earnings for the quarter fell below our expectations as we experienced continued pressure across our HA franchise. Unanticipated rebate claims from one private payer, United Optum, along with lower volume growth and decreased selling price across our HA businesses impacted our top line performance and placed pressure on our gross margin and overall profitability. Let me first address United Optum's unexpected rebate claims of approximately $4 million, which represent claims previously not billed to us. United Optum recently notified us that they had found these unbilled claims in their system through their internal audit of their rebate process in the fourth quarter, which revealed that they had under billed us. We continue to work with United Optum to assess the validity of these claims and on the reporting of rebate claims in an effort to avoid future volatility. Going forward, we would expect to see any similar dynamic that have a substantially lower impact on our results. given the renegotiated rebate rates that began in the third quarter and lower pricing on which the rebates are based. As we continue to be impacted by a significant increase in the percentage of volume of contracted business in Duralane and Jelson related to private payer contracts, this is due to the lag in receiving invoices, which can be two to four quarters in arrears consequently impacting our visibility to changing trends. The magnitude of this increase of $6 million to $7 million was above our expectations, and our team has worked with our private payers to review their claims data and understand the change. In reviewing the information and through numerous discussions with the private payers, we have determined their invoices to be largely valid. As a result, our average selling price, or ASP, for both Duralane and Jelson is now lower than previously expected. Due to the mechanics of how ASP is calculated, which is a four-quarter look-back that includes rebates paid, we expect that these larger rebate payments will continue to reduce our forecasted ASP throughout 2023. The extent of the quarterly reduction should lessen as the year progresses and the higher rebate claims are removed from the calculation and replaced with significantly lower rebate claims due to our team's successful renegotiations with payers last year. Similar to the third quarter, the most significant impact of volume was in Jelson, our three injection therapy. given the competitive dynamics volume shifted above our expectations by $1 million to $2 million in more price-sensitive or non-contracted accounts. This results in a higher portion of our Gelson revenue being in our contracted business, further increasing pressure on ASP. As we progress into 2023, we expect the decline in our ASP will enable us to regain market share related to non-contracted volume. While we anticipate continued pressure on Gelson revenue through 2023, we believe that the mechanics of ASP reporting will lead to Gelson pricing stabilizing by the end of the year. Meanwhile, revenue for Duralane, our clinically differentiated single injection HA therapy, was impacted less than Jelson. While we experienced double-digit price loss, we continued to see double-digit volume growth. Overall, Duralane revenue declined high single digits for the quarter. As with Jelson, we anticipate price erosion to subside as we progress through 2023. But given our competitive positioning, clinical differentiation, and the continued market shift to single injection therapy, we anticipate continued strong volume growth, which should offset pricing pressure and lead to overall 2023 growth for Duralane. Across our HA portfolio, we believe market growth, combined with an increase in share from lower selling price, will drive volume growth. However, we expect an overall reduction in HA revenue of high single to low double digits due to the impact of lower selling price. We do expect by Q4 23 and Q1 24 to begin to see a turnaround and an improvement in HA revenue growth driven by price stabilization and volume growth. Now turning to surgical solutions, where we continue to deliver strong double-digit organic growth. OsteoAmp Fluable, our injectable allograft bone graft substitute solution continues to drive rapidly, to grow rapidly following its introduction last year. During the quarter, we fully launched bone scapula access and combined with OsteoAmp Fluable, we now offer a complete portfolio in minimally invasive spinal fusion the fastest growing area in spine. Additionally, our ultrasonics continues to grow double digits in the U.S. on a pro forma basis. Finally, as we move into 2023, we forecast that our double digit organic growth will continue because our overall smaller market share and market growth rates provide a strong backdrop for continued market penetration and growth. Within restorative therapies, organic revenue growth contracted mid-single digits, driven by a decline in exogen. However, exogen revenue grew mid-single digits sequentially, and we see momentum building as we continue to reengage with physicians after our Salesforce realignment at the start of 2022. Within advanced rehabilitation, revenue grew despite the impact from the anticipated supply chain disruptions and regulatory approval challenges we discussed on our prior earnings call. Exiting the quarter, we received EU MDR approval for our advanced rehabilitation portfolio and resolved our domestic supply chain challenges. Removing these headwinds should enable strong double-digit growth as we move into 2023. We expect this growth, combined with stability for Exogen, will drive overall mid-single-digit growth for our entire restorative therapies portfolio. Finally, our international segment grew 13% on a reported basis, driven by our Misonics acquisition and strong organic growth for Duralane and our bone graft substitutes portfolio. Constant currency growth was 20%. growth was negatively impacted due to the EU MDR-related regulatory headwinds in our advanced rehabilitation portfolio. As we move into 2023, we anticipate above-market growth for our international segment as we realize the benefits of our broader portfolio. Finally, upon reflecting on the challenges and performance in the second half of 2022, We are shifting our attention and prioritization inwards as we focus on improving our execution, internal processes, and operational efficiencies with the resolve to accelerate our margin profile, rebuild our balance sheet, and regain investor confidence. These outcomes will come through, one, delivering on our annual operating plan where we achieve our sales plan, drive EBITDA growth, and improve operating margins. Two, completing our integration of Misonics and exploring additional financial savings across our business. And three, reducing working capital through decreased inventory and improved accounts receivable to drive cash flow. Despite recent challenges, BioVentus still retains a strong diversified business with market tailwinds. We have multiple growth drivers obtained through our recent acquisitions, such as our ultrasonic surgical solutions portfolio, peripheral nerve stimulation, and advanced rehabilitation. Each of these should be coming to fruition over the next few years and enable us to accelerate growth by leveraging our leading medical devices, scale, and commercial infrastructure. And we remain confident in our ability to deliver cost synergies from our acquisitions and improve our overall expense profile across the business to further bolster our margin profile. Finally, over the course of the next several quarters, we look to regain your confidence and our ability to execute as our results improve and we deliver on our commitments. Now I'll turn the call over to Mark.

Thank you, Ken, and good morning, everyone. Let me begin with a review of our fourth quarter results. Revenue of $126 million was a 4% lower compared to the prior year. On a constant currency basis, sales were down 3% compared to the prior year. We saw a 10 percentage point decline in organic revenue along with a 6 percentage point increase related to our acquisition of Misonics. Lower gross margin impacted our earnings as we generated adjusted EBITDA of $15 million and adjusted diluted earnings per share loss of $0.06. Across pain treatments, sales declined 23% compared to the prior year as we faced unanticipated rebate claims and pricing pressure related to our HA franchise, and a decline in volume for Jelson, as Ken described earlier. In surgical solutions, we grew 27%. We saw 14 percentage points of organic growth representing three consecutive quarters of double-digit growth as we maintain momentum across both our bone graft substitutes and ultrasonics portfolios. The fourth quarter included a 13 percentage point contribution for one month related to myosinics ultrasonics portfolio. Finally, restorative therapies delivered 4% growth. Organic growth declined 6 percentage points as anticipated supply chain headwinds along with the delayed receipt of EU MDR certification and advanced rehabilitation impacted revenue. Inorganic growth related to our wound portfolio acquired a year ago totaled 10 percentage points. Moving down the income statement, adjusted gross margin of 71% was 510 basis points compared to the prior year and was driven by two primary factors. First, we were impacted by the unanticipated rebate claims the increased percentage of HA revenue going through private payers, and the decline in our overall ASP, which Ken discussed earlier. Second, we had an unfavorable product mix, given higher revenue from businesses recently acquired, combined with the impact of lower revenue from Exogen. Overall, adjusted total operating expenses were $1 million higher compared to the prior year, as investments in selling and general and administrative expenses more than offset reductions in spending on research and development. Now turning to our bottom line financial metrics, adjusted EBITDA totaled $15 million, compared to $28 million in the prior year. Lower gross margin, as discussed a moment ago, drove the majority of the decline. Adjusted operating income decreased to $12 million from $22 million in the prior year. Adjusted net loss totaled $9 million compared to the income of $18 million a year ago due to lower gross profit and higher interest expense. Now for a brief recap of our full year results. Net sales increased to $512 million, a 19% increase compared to 2021. Organic sales increased 1% while the acquisitions of Bioness and Misonics contribute 18 percentage points of growth. For the year, adjusted EBITDA totaled $66 million. Adjusted gross margin for the year was 75% compared to 78% a year ago. Our 2022 adjusted gross margin reflects the impact of our Misonix acquisition, along with the lower average selling price in the second half of the year in our HA franchise, which I mentioned previously. Adjusted operating income for the year totaled $48 million compared to $85 million in 2021. The decrease is primarily due to lower gross margin discussed earlier and higher interest expense from increased debt and higher interest rates. Now turning to the balance sheet and cash flow statement. We ended the quarter with $32 million of cash on hand and $418 million of debt outstanding. Our revolving credit facility remained undrawn at the end of the fourth quarter. Operating cash flow represented an inflow of $5 million for the quarter as we saw an improvement in working capital. As Ken mentioned, we engaged our banking partners upon the termination of Cartahiel and have amended our debt agreement to provide additional headroom and leverage and interest coverage, covenants beginning with the fourth quarter of 2022 and extending through the first quarter of 2024. Our covenant will revert back to their existing level for the second quarter of 2024. The amendment will increase the spread of our term loan by 100 basis points. Thus, we pay SOPR plus 425 basis points on our debt. We received relief against our financial covenants and project compliance through Q1 of 2024 based on our financial plan. However, our business will continue to carry a going concern qualification based on the risk we will not be compliant with the covenants after the expiry of the relief. and for qualitative factors that remain and may impact our ability to execute effectively, which we are in the process of addressing. Finally, due to the timing from any upcoming potential divestitures and uncertainty around the amount of rebates related to our HA business, we have decided to delay establishing our 2023 sales and earnings guidance until the impact of these can be firmly quantified. However, as we end the first quarter, we would like to provide some color on our expectations for the quarter. We see revenue growth of low single digits compared to the prior year, as strong growth across surgical solutions and restorative therapies is offset by a decline in pain treatments. Additionally, we expect the adjusted EBITDA to be flat to slightly above the prior year. In closing, we are focused on enhancing our liquidity in improving our revenue forecasting and expense management processes. Operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 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 2. At this time, we will pause momentarily to assemble our roster.

The first question today comes from Alex Nowak with Craig Callum.

Please go ahead.

Okay, great. Good morning, everyone. Ken, I wanted to do a little bit of a reflecting question here. You know, when you go back and look at the last several quarters, How did we go from the pain therapy business? How did we go from the CMS change not expecting to have an impact to it ultimately having a greatly lowering ASPs, impacting volume, impacting the rebate claims that we're seeing here today again? So, I mean, when you look back, just what did you and the team miss there?

Yeah, great question, Alex. And I think when we look at this, what we did not anticipate is largely the percent of contracted business that was going through on our HA business. Keeping in mind two factors there. When we ship an HA syringe out, we don't know if it's going to a contracted patient or a non-contracted patient. We don't have visibility to that for two to four quarters looking back. So As we move forward in the second half of 2022, we saw an unanticipated rise in our contracted business that was beyond what was modeled and beyond the trends that we had in the business. This factor alone had a significant impact because when you look at this change from wholesale acquisition cost to ASP, and then compound with a higher percent of contracted business. That obviously not only weighs on higher rebate payments, which were not anticipated, but obviously weighs on your ASP because that becomes part of the calculation on the quarter that the rebates paid. Going forward, we do feel the lights at the end of the tunnel here. The renegotiated rebates are approximately on a broad basis 65% lower in the ASP world. And as we go into the second half of 2023, we'll be paying those lower rebates. And that will have the ability to modify or really solidify our price and reduce the price decline and stabilize the price and increase the price as we get into 2024. But obviously, fundamentally on the business, we'll have a big financial difference paying the lower rebates. But that was the biggest issue, Alex, is not having the transparency relative to the amount of contracted business and seeing that increase off a slope that was not anticipated.

And I want to continue around that, you know, when things start to improve. Because, you know, last quarter it was expected, you know, doing a 12-month after the CMS change went into place, was when you would start to see the headwinds start to abate. But now it's, you know, calling it into 2024. So, like, from last quarter to this quarter, what changed there to now we're talking 2024-ish sort of improvement when things get back to a growth, you know, stronger growth?

Yeah, well, first of all, the WAC rebates continue to impact our ASP growth. through the first half of this year. And keep in mind, it's a four-quarter look back. So due to the extent of the contracted business that we have and what we estimate now, the impact of the WAC rebates, because it's a four-quarter look back, becomes a longer process to actually fall off. So as we start getting to the end fourth quarter of this year and first quarter of 24, those will be lessened that will cause price stability and actually our prices with Jelson and Duralane to rise as we go through 2024. But really what's driving that Alex and shifting that out is just the percent of contracted business that we have.

Okay. Got it. And then just to kind of a two part question here, I just want to confirm Cartichiel is completely off the table. There are no further extensions that sit out there as of today. And then the second part of that is how should we be thinking about spinoffs? What is for sale? What are you willing to part with? What are you unwilling to part with?

Yeah, I would say with CartiHeal, yes, that is off the table. We have exhausted all possibilities there, and the team worked really hard to try to find solutions that made financial sense, but those weren't forthcoming. So we are moving on from CartiHeal. Regarding divestitures, we're not going to comment significantly on that. Obviously, we have a great business here at BioVentus and still a thriving business in all aspects with the headwind of HA, which will recede as we go through 2023. We'll provide more updates on divestitures if and when it occurs, but right now we're focused on building our business the way it is. We've got a solid business across multiple specialties in orthopedics that give us a lot of room and a lot of runway for continued growth, really based on market tailwinds that work in our favor for many years to come. Okay, understood. Appreciate the update. Thanks, Alex.

The next question comes from Robbie Marcus with J.P. Morgan. Please go ahead.

Hi, this is Alan on for Robbie. I just had, you know, a question, I guess, looking out further to say 2024. Clearly this year, you're still working through quite a few challenges. You're working to, you know, stabilize quite a bit of the business. So when we look at the 2024 and kind of bioventus and what should hopefully be a much cleaner slate. How should we think about your top-line revenue generation capability as well as your ability to continue driving cost savings beyond the $9 million to $10 million annual savings going forward? Thank you.

Yeah, Alan, I can comment, and I'll let Mark make a few comments as well. Obviously, we see a lot of ability to continue to drive growth and growth levers in our business. It starts with surgical solutions in both our ultrasonics industry Portfolio, which is expanding with both the bone scapula access launch and then this year, SanaStar Elite, which is a next-generation tumor ablation product. And we continue to evolve in bone graft substitutes, and the OsteoMAP flowable continues to penetrate the market in minimally invasive spinal fusions. Across the portfolio, advanced rehabilitation. We expect continued double-digit growth. That acquisition came through with our Bioness acquisition a couple of years ago. And also in that portfolio under pain treatments is peripheral nerve stimulation, where we expect in 2024 to launch the Talisman, our next generation peripheral nerve stimulation device. So those are some of the near-term growth drivers. You know, as far as expenses, we continue to see opportunities across the business, largely to improve our processes, As we consolidate the businesses that we've acquired, we see many opportunities to improve ourselves, improve accounts receivable, our working capital, as we mentioned on the call. But Mark might want to comment further.

Yeah, no, I agree with Ken's comments. I think first, you know, we've done a really good job over the last few months of looking at ourselves in the mirror from a cost structure perspective and making those, you know, reductions and improving our efficiencies where we, you know, think that is needed the best. And so that positions us well to fight some of the headwinds we do have from an HA perspective. And we're going to continue to look at that as we go through 2023. I mean, as Ken said in his remarks, we need to be inward focused in 2023 and really figure out how we simplify our business through some of the divestitures that we're looking at. And that brings in cash flow, but it also brings in efficiencies within our organization and allows us to focus on the more important strategic businesses. And so we'll continue to do that and continue to look at our cost structure, find out how we can simplify and reduce costs where necessary and improve our processes, which is an important part of our success.

The next question comes from Kyle Rose with Canaccord. Please go ahead.

Hi, this is Caitlin on for Kyle. So just on exogen, you noted on your last call that you thought exogen slower than expected recovery would remain for the rest of 2022. So, you know, what are your updated expectations now and what's really giving you confidence in recovery and exogen?

Thanks. Yeah, thanks for the question, Caitlin. We saw a nice sequential growth from Q3 to Q4 in Exogen, which I think shows signs of stability. And what we expect from Exogen going forward is stability. We don't expect it to be a growth driver, but we expect low single-digit growth in Exogen. The market has come back nicely post-pandemic. And this product in particular, I think, was the slowest to recover. And then, as we mentioned, we did reorganize our sales force in early 2022. That caused a shift in some of our Exogen business just based on relationship changes. And that has now matured. The sales force that is driving this has developed new relationships and rapport that's continued to drive improvement in our Exogen business overall. So our hopes as we go into this year is really a low single-digit grower for our business.

Great, thanks. And just on the unanticipated rebate claims, I know you talked last quarter a little bit about how you're trying to prevent these going forward. Can you maybe talk a little bit more about about how you're doing that. Thanks.

Yeah, we just, we continue to, yes, one, I would just emphasize what we talked about is the unknown amount of rebates in the future will be much less and, you know, a lot less material to our business. So that's positive, number one. The second thing is, you know, continuing to invest in this area with additional scrutiny and analytics around this to make sure that we're, you know, anticipating that, you know, further, deeper analysis of the invoices that we receive and working with our different partners across the payers to understand each of those invoices and, you know, encourage and work with them to increase the integrity of the invoices that we're getting. So I think it's really a combination of all of those, you know, to improve our confidence going forward.

Got it. Thank you.

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 Drew Ranieri with Morgan Stanley. Please go ahead.

Hi, this is Anna on for Drew. Thanks for taking the question. For 2023, I was wondering if there's anything you could give us on cadence through the year, either on revenue or margins. Should we be thinking about seasonality? similar to historical with the exception of pain treatments given the pricing headwind there?

Yeah, this is Mark. I'd say that we don't expect to have, you know, a lot different kind of revenue phasing throughout the year. It wouldn't be a lot different than we've historically had. We don't expect any big spikes or troughs.

Great, thanks. And then for growth margin, should we be thinking about maybe low 70 as the right run rate going forward or maybe any color on the moving parts for gross margin into 23 would be helpful.

Yeah, we're not going to get into comment on that since we're, you know, not providing guidance, but, you know, wouldn't expect it to be, you know, significantly different than what we've seen, you know, coming out of the fourth quarter.

Great. Thank you.

This concludes our question and answer session.

I would like to turn the conference back over to CEO Ken Reale for any closing remarks.

Well, thanks everyone for your continued interest in BioVentus. While near-term challenges remain in our business, we are confident in the revenue and earnings growth opportunities as we move through 2023. We participate in large growing markets and provide innovative, differentiated products to our patients. Most importantly, we have a dedicated team of employees that are focused on our mission and stakeholder value creation. In the coming quarters, we look to regain your confidence in our ability to execute and deliver on our commitments as we begin to improve our growth and margin profile to create stakeholder value. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.