Bioventus Inc.

Thank you for standing by. My name is Dustin and I will be your conference operator today. This time, I'd like to welcome everyone to BioVentus Inc. Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, Please press star 1. At this time, I'd like to turn the call over to Mr. Dave Crawford, Vice President of Investor Relations. Sir, you may begin your conference.

Thanks, Dustin, and good morning, everyone, and thanks for joining us. It is my pleasure to welcome you to the BioVentus 2023 Third Quarter Earnings Conference Call. With me this morning are Tony Veal, CEO, and Mark Singleton, Senior Vice President and CFO. Tony will begin his remarks with an update on our business and outlook for the remainder of the year, followed by a review of the quarter. Mark will offer further detail on our third quarter results and discuss the update to our 2023 financial guidance. We will finish the call with Q&A. A presentation for today's call is available in the investor section of our website, bioventus.com. Before we begin, I would like to remind everyone that our remarks today contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated. including the risks and uncertainties described in the company's filings with the SEC, including item 1A risk factors of the company's Form 10-K for the year ended December 31st, 2022, as well as subsequent Forms 10-Q and other company's filings made with the SEC. You are cautioned not to place undue reliance upon any forward-looking statements which speak only as 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 or GAAP. We generally refer to these 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 Investors Relations portion of our website at bioventus.com. And now, I'll turn the call over to Tony.

Thanks, David, and good morning, everyone, and thank you for your continued interest in BioVentus. Let me begin by saying that I am again encouraged by the strength of our results for the quarter. as we delivered earnings ahead of our expectations for a third consecutive quarter, raised our annual financial guidance. The highlight for us was the return to growth for our HA business, one quarter ahead of schedule. Our resilient employees have worked diligently to address last year's challenges and have made measurable progress in improving our execution, delivering on our commitments, enhancing our business controls and processes. Before discussing the quarter's performance, I want to take a moment to reflect on the recent progress made to solidify our financial metrics. We believe successfully delivering on our financial plan this year will position us to deliver future improvement in revenue growth, profitability, and predictability. As I mentioned in the past, we will not reverse last year's headwinds and fully rebuild our balance sheet, earn back stakeholders' trust, and regain credibility with our investors with a couple of quarters of strong performance. With that said, I believe we have achieved substantial progress to solidify our financial position and maximize the long-term opportunities for BioVentus as we begin to gradually increase our attention to future growth drivers. During the quarter, we demonstrated several positive indicators of our future success, including, one, the continued financial discipline to reduce spending and enhance operating margin. Two, as I mentioned earlier, we saw a return to growth for our HA business, including continued double-digit unit volume gains. And three, we achieve double-digit growth across key long-term revenue drivers in our ultrasonics business and across our international segment. As we begin planning for next year, we remain focused on investing and prioritizing areas of our business where we believe we can deliver sustainable, profitable growth. We believe the steps we are taking will result in enhanced growth and increased visibility to our key business drivers. While less visible, we've begun to show signs of improvement in stabilizing our organization. My leadership team and I are encouraged by the results of our recent employee engagement survey as we look to continually strengthen our culture. From a headline perspective, we saw an improvement in our employee engagement scores, which is important given the challenges we placed on our teams over the past two years. As a positive sign of engagement, 85% of our employees participated in the survey, well above industry benchmarks, and they provided over 1,400 comments. We're committed to work together create a culture that is inclusive, engaged, and empowered as we deliver on our promises to our customers, employees, shareholders, and the communities where we operate. Our impressive performance so far this year has reinforced my confidence in our ability to reduce leverage and to enhance our revenue and earnings growth opportunities as we maintain focus on cost control. We participate in large growing markets and provide innovative, differentiated products for our patients, Across each segment of our business, BioVentis is either a market leader or growth leader. Now let me turn to the third quarter results. For the quarter, revenue of $121 million declined 6% compared to the same period a year ago. However, when considering the impact of our wound business divestiture, growth was even compared to the prior year. More importantly, our adjusted EBITDA of $22 million was above our expectations do impart the stringent control of our expenses and the significant improvement in our accounts receivable collections over the course of the year, which enabled us to have a favorable adjustment to our bad debt reserves. Year-to-date, adjusted EBITDA has increased more than $15 million, representing a 30 percent increase. Across pain treatments, as I highlighted earlier, we saw significant double-digit gain in volume for Duralane as we continue to take market share with our clinically differentiated offering. Overall volumes were also higher for Jelson and Sioux Farms. While we continue to be impacted by the decline in our average selling price for Duralane and Jelson, that headwind has steadily declined on a sequential basis. As we mentioned previously, we expected the average selling price for Duralane to increase sequentially in the fourth quarter. CMS published pricing for Duralane in mid-September, and it showed the ASP for Duralane was increasing for the fourth quarter, as we predicted. However, we do anticipate a temporary sequential decline in pricing for Duraline in the first quarter 2024. After the first quarter, we expect to see CMS pricing rising sequentially for the rest of the year. Due to a higher percentage of contracted volume for Jelson, the average selling price has continued to decline sequentially. We continue to expect that by mid-2024, we will see ASP for Jelson begin to rise sequentially as well. While the move to ASP combined with higher-than-anticipated private-payer contracted volumes, presented meaningful headwinds to our HA business. We are now returning our overall HA portfolio to growth. We believe market growth, combined with an increase in market share and improving pricing dynamic, will enable mid-single to high single-digit growth in the coming year. Now turning to Surgical Solutions, in the third quarter, our Ultrasonics portfolio grew at its highest double-digit rate of the year. We expect the momentum to continue into next year. We believe our leading technology and small market share provide a strong backdrop for continued market penetration and growth across ultrasonics. Limiting the overall growth for surgical solutions was a slower than anticipated recovery in our bone graft substitute business. When we brought up on a sequential number of new distributors and accounts, the ramp up in sales volume trailed our expectations. Beginning in the fourth quarter, we've implemented structural change to our surgical solution selling effort, which we believe will improve growth and eliminate potential channel overlap. Our direct sales team will now focus on ultrasonics as primary target, and our distributors will focus on bone graft substitutes as their primary target. We believe this increased attention will help limit any further distributor churn in bone graft substitutes while driving improved efficiency in our recent account conversions. Within restorative therapies, Organic revenue declined double digits when removing the impact of our wound business divestiture. Revenue growth and advanced rehabilitation was impacted by accelerated placements of vector weight-bearing systems in the second quarter. Exigent revenue fell slightly compared to prior year, but revenue increased sequentially in the U.S. and reflect the improving trend we're experiencing across the business as we continue to reengage with physicians after our Salesforce realignment last year. Finally, our international segment grew 18 percent with constant currency growth of 16 percent. Growth was driven by strength across our surgical solutions business. While international growth is expected to temporarily slow in the fourth quarter due to challenging comparisons to prior year period, we anticipate maintaining double-digit growth for our international segment in 2024. Finally, I'm pleased with our ability to address last year's headwinds and achieve meaningful improvement in our financial results and liquidity. We've improved the predictability of our HA business and demonstrated the ability to manage through complex changes. While more work remains, our resolve is steadfast in executing our business plan and prioritizing those areas we believe are most meaningful in driving increased profitability, improving our balance sheet, and enhancing our operational efficiencies and internal controls as we work to restore your confidence in BioVentus. Now I'll turn the call over to Mark.

Thanks, Tony, and good morning, everyone. Let me start by saying that I am delighted with the sizable improvement in our leverage so far this year, as well as the reduction in our cost structure and improvements in our internal control environment. Throughout the entire organization, our teams have executed well against our financial objectives. In addition, the predictability of our business has significantly improved, enabling us to have confidence in raising our financial guidance and increased visibility as we plan for 2024. Now turning to our results for the third quarter, revenue was $121 million, which was a 6% lower compared to the prior year. Adjusting for the divestiture of our wound business, revenue growth was even when compared to the prior year. In addition, adjusted EBITDA of $22 million was also even compared to prior year adjusted EBITDA from continuing operations. Lower operating expenses from our focus on reducing spending and benefits from our restructuring initiated at the start of the year were offset from lower gross profit due to the reduction in revenue. Across pain treatments, revenue returned to growth as sales increased 3% compared to the prior year as we continued our strong double-digit volume growth across Duralane, which more than offset the continued pricing pressure due to the move from WAC to ASP. As a result of its continued momentum and significant share gain from its clinical differentiation, Duralane now makes up nearly two-thirds of our HA revenue. Meanwhile, as we previewed last quarter, volume increased for Jelson compared to last year, although overall revenue was down slightly as pricing headwinds similar to Duralane remained. As we look to close out the year, we expect to see growth across our HA platform continue to accelerate for the fourth quarter. In surgical solutions, we grew 7%. Ultrasonics maintained strong double-digit growth, but slower-than-expected recovery in bone graft substitutes impacted overall growth. We expect fourth-quarter growth to be below trend, given the slight delay in the acceleration of our bone graft substitute franchise that Tony mentioned. Overall, we remain excited about the continued momentum in ultrasonics and long-term prospects for it to be a major driver of our future revenue growth. Finally, restorative therapy sales fell 28% in part by the impact of our wound business to Vetchester, which accounted for 15 percentage points of the decline. On an organic basis, restorative therapies declined 13 percentage points, driven by significant reductions in our advanced rehabilitation business. This reduction was partially due to the impact of accelerated sales in the second quarter due to customer demand that we highlighted on our previous earnings call. In addition, prior year revenue was higher than normal due to the recovery from earlier in the year supply chain disruptions. We anticipated a return to growth for advanced rehabilitation in the fourth quarter. Sales for Exogen for the quarter were down low single digits as we continue to see improved stabilization as revenue in the U.S. for Exogen continued to grow sequentially. Moving down the income statement, Adjusted gross margin of 75% increased 30 basis points compared to the prior year. Overall, adjusted total operating expenses were almost $9 million compared to the prior year. The reduction in expense resulted from benefits of our restructuring and wound business divestiture, combined with spending discipline across general and administrative expenses. The decline in overall operating expenses was minimized by a significant reduction in our accrual for management incentives for the prior year. Now turning to our bottom line financial metrics, adjusted EBITDA of $22 million was even with the $22 million for continuing operations earned in the prior year. Adjusted operating income increased to $20 million from $17 million in the prior year. while adjusted net income totaled $5 million compared to $11 million a year ago. Adjusted earnings per share were 5 cents for the quarter compared to 18 cents in the prior year. Now turning to the balance sheet and cash flow statement. We ended the quarter with $27 million of cash on hand and $395 million of debt outstanding. We had $15 million drawn on a revolving credit facility at the end of the third quarter. Operating cash flow represented an outflow of $8 million for the quarter due to a negotiated delay in payment of rebate claims to private payers since the first quarter. These medical rebate payments were the last calculated under WAC pricing with higher rebate rates and will come down going forward. We forecast a return to positive operating cash flow in the fourth quarter as working capital normalizes. From a liquidity perspective, Our adjusted EBITDA for the year remains ahead of our expectations, and we are well within the compliance with our leverage and interest coverage covenants at the end of the third quarter. Finally, let me review our 2023 guidance, which has been updated to reflect the performance of our business in the third quarter and our fourth quarter expectations. We now expect 2023 revenue to be $498 million to $505 million an increase in the midpoint from our previous guidance of $490 million to $505 million. Our guidance for adjusted EBITDA is now expected to be $84 million to $87 million, an increase from our previous guidance of $75 million to $80 million. Finally, our guidance for adjusted earnings per share is now expected to be a loss of 12 cents to a loss of 9 cents, an improvement from our previous guidance of a loss of 24 cents to a loss of 20 cents. In closing, the execution of our business plan for three straight quarters and it has enhanced our liquidity position and with our improved processes and controls, our visibility into the business has increased leading to what we believe will be improved predictability. As we close out the year, we plan to remain steadfast in improving our financial performance through increased revenue and disciplined expense management. Operator, please open the line for questions.

Thank you.

This time, I'd like to remind everyone that in order to ask a question, please press star 1 on your telephone keypad. We'll pause for just a minute to compile the Q&A roster. And your first question comes from the line of Chase Knickerbocker from Query Column. Sir, your line is open.

Hey, guys. Congrats on the progress, and thanks for taking the question. First, for me, I just want to understand, I guess, the decrease in expenses year over year. We kind of look on that year over year basis. You just walked me through the delta, that $10 million delta on SG&A as far as how much of it from lower sales, how much of it's from savings, you know, from the wound divestiture, and then how much is from, you know, other restructuring activities.

Yeah, thanks, Chase, for the question. This is Mark. When we look year-over-year expenses, our expenses first start with the expenses are really down more than what you see. If you remember last year, and I mentioned this in my prepared remarks, but we had a big reduction for management incentives in third quarter last year in the $8 million range. So that was drawn out of our expenses. If you normalize that, it would be down even further. But this just gets into our continued discipline and expense areas of reducing, you know, sales that we initiated in the beginning of the year. So overall, we see, you know, continued discipline and expense. And really the only one-time item I would say that we had in there was a progress that we made on our accounts receivable bad debt. It was a credit to our P&L of roughly $2 million.

But overall, we feel good about where we're headed with expense.

Got it. And then I just want to make sure I understand the Duralane kind of ASP impact again in first quarter. Can you just walk me through kind of the moving pieces there? I'm sorry I missed it.

Yeah. You know, as we said in our prepared marks, you know, back to, you know, being more predictable, we did say that the ASP was going to increase in fourth quarter, and that's what we've seen. And we've gotten a lot better at understanding our processes around this and a lot better handle that's improved our predictability and visibility into this from a CMS perspective. This is a really complicated formula, I'd say, as far as the calculating the CMS. And there's a lot of factors that go into it. One of those factors that was unique that we saw in third quarter was one of our major distributors reduced their inventory days on hand that they carry of Duralane and some of our other HA products. And by them drawing that down, it has an impact on our first quarter ASP. But we're confident that it'll bounce back. in second quarter and beyond to continue to increase sequentially. So we view this as a temporary reduction in one Q and would see that to continue to increase over sequentially over 2024. Got it.

And I mean, we can see kind of the volume increase in the background for Duraland and it's been quite impressive. How do you think about kind of holding on to some of that volume growth as your ASP does start to improve you know, I guess ask it another way, what kind of part of that volume growth has been driven by kind of lower acquisition costs for customers, you know, versus other kind of moving pieces there?

Yeah, I'd say, you know, through the first three quarters, we're very pleased with the growth that we've seen in our HA portfolio. You know, Perdura Lane specifically continues to grow double digits and expect that to continue, you know, into 2024. And we'll see, you know, prices continue kind of sequentially, you know, increase as we talked about. But again, it's a clinically differentiated product. We don't see, you know, as the prices started to increase as we go through 2024, we don't see that changing our ability to continue to grow the product as the clinical differentiation will be there. our strong position with the payers that we've talked about before will continue to be there. And our sales team will continue to execute at the same levels that they have been. So, you know, we see this as continuing into 2024, as we said in the script, you know, from a mid to high single digits growth in 2024. Yeah.

But then just last for me, I want to make sure I understand kind of the moving pieces in surgical and So we kind of shifted to other distributors. Did maybe some of those customers not come back as quickly as we thought on the bone graft side? And then kind of when could we get back to kind of double digits growth in surgical? And is that just driven by kind of recovery with those customers that you're going to get back or kind of just growth within those new distributors that you kind of passed off your bag to?

Yeah, thanks, Chase. Tony Beal, let me take this one. First of all, you know, as I mentioned in my comments, we did do some changes in the structure among our surgical sales force, surgical solutions. And the key thing here is, you know, our focus as we reestablished that sales force with the acquisition of Masonics was focused on execution. We knew which our distributors were selling the bone graft product and our direct sales people were selling the ultrasonic product. And we had them overlapping a bit as they were trying to demonstrate the opportunity for some synergies. I think we found that there was perhaps some little bit of an overlap in the channel. And so we've decided to move forward with Our distributors are our primary driver of bone graft, and we believe that will stabilize that team. We're focusing our efforts of a very direct group of people who will manage that group as they have in the past. So we're sort of going back to the future there, if we will, a little bit. The good news is we're going to maintain some synergy here because those distributors are also have also been effective in selling ultrasonic products. In fact, they're probably selling more than 10% or 15% of our total ultrasonics by their great relationship standing in surgery with spine surgeons. So we think bifurcating that sales force back to where they were, but still allowing them to have You know, if they have opportunistically reaching over, but they don't have sales quotas, they're not going to have what we believe was a developing channel conflict. So, you know, what's going to happen in bone graft? I think, you know, we've been we've been driving growth with new product, the new fibers and flowables. allografts, and those have been, you know, a big driver of our growth, that's probably going to stabilize a little bit. You know, it's probably going to settle. And so, you know, we'll be continuing to see growth from that. But the question is when that will be sort of moderating more to high single-digit growth rather than double-digit. So I think we're going to continue to monitor carefully. We're continuing to look at new product ideas. But right now, we're feeling positive about these changes. And it's going to be a couple of quarters before you see all the benefit of it.

Great, thanks for the questions, guys, and congrats again on the progress. Thank you.

The next question comes from the line of Robbie Marcus from JP Morgan. Your line is open.

Hi, this is actually Lily. I'm for Robbie. Thanks for taking the questions. This year has had some challenges, but it seems like you've made some good progress stabilizing some of these trends. And I know it's still early, but as you look out to 2024, how do you think about your ability to drive overall revenue growth next year? And what sort of headwinds and tailwinds should we be keeping in mind?

Yeah, we look into 2024, you know, we expect a return to growth. You know, we're going through our plan on 2024 as a team right now. and looking for, you know, solid growth in that in 2024. As we talked about HA, we look to have mid to high single-digit growth. And so as prices stabilize and we expect the volume to continue to grow, we also, you know, the team's done a really good job on, you know, improving our processes around the predictability of our total business, but also in HA. And that will help us have confidence in managing that. And we'll also continue to our disciplined expense trends and culture that we've developed in 2023. But I think starting in Q4 and we look into 2024, we're going to start to look at investments that are going to drive, return the business back to growth. And we talked about having solid growth in 2024. So we'll start to look at some commercial investments starting in Q4 with our sales team, as well as R&D investments that will help drive the growth over the long term. So both of those will be investments that we would make. And so when we look at 2024, off of the guidance numbers that we're providing, we would expect to see a smaller than the expected increase in EBITDA. We expect to increase it, but it's not going to be maybe as much as what you would expect with the growth that will drive just because of some of the investments that we're putting back to drive growth in 2024 and beyond.

Great. That's really helpful. And how do you think about where the portfolio stands today? Are there still any divestitures potentially on the table? And where does M&A fit into the equation as you think about continuing to drive growth and innovation? Thanks so much.

Hi, Lily. Tony Beal, let me take that one. First of all, yeah, M&A is probably not in the near term on our horizon. I think our focus is to digest a lot of great products and a lot of great processes that we have in our current portfolio. So that's what we're focused on in I think for the foreseeable future, at least for the next year or so, you'll continue to see us focus there. I think that from a standpoint of whether we're looking at our portfolio, yes, we're constantly looking at it. Those activities are ongoing. Nothing new to report here today, but have confidence that we are evaluating where can we make investment to fund future sustainable, profitable growth and continue to focus on those businesses and And, you know, we'll continue forward with our evaluations of what belongs in the portfolio and what might change. But right now, we're very, very focused on driving what we have in our portfolio. And we feel comfortable that we don't have anything that we're forced to do. We have good cash generation from the businesses we have, but we will continue to evaluate.

Great. Thank you. Thank you again.

If you'd like to ask a question, please press star one on your telephone keypad. Next question is coming from the line of Bill Plovenich from Canaccord.

Your line is open. Yeah, thanks. My question's been answered. Thanks.

With that, there are no further questions at this time. I'd like now to turn the call over back to our CEO, Tony Beale.

Well, thanks everyone for your interest in BioVentus. We continue to generate significant improvement in our financial position through strong execution of our business plan. Our increased visibility into our business provides us with confidence in our ability to raise our revenue and earnings commitment for the year. My leadership team and I lead a dedicated team of employees that are focused on our mission and stakeholder value creation.

Thanks again. This now concludes today's conference call. Thank you for joining. You may now disconnect.