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.