Bioventus Inc.

Good day and welcome to the BioAventus First Quarter 2024 earnings conference call. All participants will be in 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 your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to hand the call over to Dave Crawford, Vice President of Investor Relations. Please go ahead.

Thanks, Andrea, and good morning, everyone. And thanks for joining us. It is my pleasure to welcome you to the BioAventus 2024 First Quarter earnings conference call. With me this morning are Rob Claypole, President and CEO, and Mark Singleton, Senior Vice President and CFO. Rob will begin his remarks with an update on our 2024 priorities and our business. Mark will provide detail of our first quarter results and discuss our updated 2024 financial guidance. We will finish the call with Q&A. Our presentation for today's call is available on the Investors section of our website, bioaventus.com. But 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 10K for the year ended December 31, 2023. And as such factors may be updated from time to time in the company's other filings made with the Securities and Exchange Commission. Your caution not to place a new reliance upon any forward-looking statements, which speak only as the statement that 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 by the 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 investor relations portion of our website at Bioventus.com. Now, I'll turn the call over to Rob.

Thanks, Dave. Good morning, everyone, and thank you for joining our call this morning. We're off to a very strong start to the year, and our Bioventus team is driving significant improvements across our business. During our last call, I introduced the three priorities we're focused on, accelerating revenue growth, improving profitability, and enhancing our liquidity position. I'd like to begin today by reviewing our progress. With respect to our first priority, accelerating revenue growth, we delivered 15% organic revenue growth in Q1 after removing the impact of our wound investiture. Our team generated this strong performance through better strategic focus and disciplined execution of the plan that we established at the beginning of this year. Let me share a few of the highlights. With respect to our HA business, the material impact from the reimbursement change is behind us, and we delivered double-digit growth in Q1, which was propelled by significant volume growth in Duralane, our single-injection therapy. Duralane now accounts for over two-thirds of our total HA revenue, and we believe we have a platform for sustained growth with this clinically differentiated therapy for several reasons. First, the market continues to shift from multi-injection therapies to single injection, which is why it's the fastest growing segment of the HA market with projected annual growth in the mid-single digits. Next, the awareness and recognition of Duralane's compelling clinical differentiation is spreading, which is why more clinicians and patients are making it their preferred choice. Positive impact from this market growth and clinical differentiation is augmented by the fact that BioVentus now has the most preferred payer coverage in the U.S. in the single injection market thanks to our team's successful contracting strategy. BioVentus also has the largest fully dedicated HA commercial team in the U.S., and our team is doing a great job shifting their time and efforts to target larger accounts, which is producing early gains. All of these volume growth drivers will be supported by continued sequential price increases that we expect will ramp up during the second half of this year. And we currently only have about a 25% market share in the single injection market, which further enables us to grow our HA business well above market over the next few years. As a result of this powerful combination and our expectations for the remainder of the year, we anticipate HA revenue growth in 2024 to be high single digits to double digits, which is an increase from what we previously shared. Regarding surgical solutions, we also accelerated to double digit growth across both ultrasonics and bone graft substitutes in the first quarter. Let's talk about ultrasonics first. I'm encouraged by our progress with our Q1 performance, but even more excited about our long-term potential with this business. Our unique technology provides surgeons with more control and versatility while saving them valuable time, which is why we believe our technology can become the standard of care. Meanwhile, our bone graft substitutes team is strengthening our commercial execution with both existing and new distributors, which resulted in above market growth in Q1. As a result of our momentum with both ultrasonics and BGS businesses, we now expect double digit growth across surgical solutions in 2024. And with respect to our international segment, Q1 growth was below our expectations due to the timing of some shipments. While the team is focused on driving more consistent quarterly results in the short term, we remain very optimistic regarding the long-term growth potential of this business. And I'll tell you, Mark and I were in Europe a few weeks ago to dive into the business, collaborate with our team on our growth priorities, meet with customers, and our visit confirmed for us that our international business possesses significant untapped potential, which is why we expect strong and sustainable double digit growth as we build out our international presence with a targeted focus on the products and geographies that will generate the highest ROI. Now I'll shift to our second focus area, boosting profitability. I'll start by highlighting that we have a very healthy, peer-leading gross margin in the mid-70s. The reason I mention this is because when our first priority of accelerating revenue growth is combined with a gross margin in the 70s, it paves the way for sustained increases in our EBITDA and operating margin. As a result of our Q1 revenue acceleration and healthy gross margin, we drove over a 300 basis point increase in our adjusted EBITDA margin. And as mentioned during our last call, revenue growth is not our only tool to improve our profitability. We will continuously explore areas where we can reduce costs over the coming months and years to either invest in more productive initiatives with a higher ROI or to drop the savings to our bottom line to further accelerate our margin expansion. And now I'll turn to our third major focus area, improving our liquidity position. We reduced our net leverage ratio to below four times at the end of Q1 because of our increase in adjusted EBITDA. The reduction in net leverage to below four times was significantly ahead of our prior expectation of achieving this target by the end of 2024. We will stay focused on this priority as we expect to continue to steadily pay down our debt in the quarters ahead. And we are committed to reducing our net leverage ratio to around three times as we exit 2025. That concludes my update on our three priorities. Before turning it over to Mark to dive deeper into our financials, I want to emphasize that although we have significant work ahead of us, I'm excited about the excellent teamwork that's taking place across our organization to advance our business. We are improving our fundamentals every single day in many areas ranging from better sales operations to enhance our customer experience to more disciplined supply chain and inventory management to support our growth and improve our future cash flow to dispassionate and closely tracked resource reallocation based on our priorities. Moving forward, my leadership team and I will be laser focused on consistently delivering strong results quarter after quarter and year after year across each of our three priority areas. And as we continue to accelerate revenue growth, boost our operating margin and generate increased free cash flow, we expect our valuation multiple to align with our peers, which will translate into significant shareholder value creation. I'll turn the car all over to Mark. Thanks,

Rob. And good morning, everyone. Let me start by saying that I'm excited about the momentum exhibited throughout our business. The robust execution by our commercial organization drove meaningful revenue and EBITDA growth. Meanwhile, our corporate teams made tangible progress on improving our processes. As we move forward, we look to consistently approach our business with a continuous improvement mindset to enhance our performance and drive further efficiency across BioVentus. Now turning to our results for the quarter, revenue of 129 million dollars represented growth of nine percent compared to the prior year. Both our HA and surgical solutions businesses performed better than our expectations. Adjusting for the divestiture of our wound business, organic revenue increased 15 percent. In addition, adjusted EBITDA of 23 million dollars increased six million dollars and represented a 33 percent increase compared to the prior year. The increase was driven by higher revenue and improvement in our gross margin. Adjusted gross margin of 76 percent increased 190 basis points compared to the prior year. This was a result of favorable revenue mix, given strong growth from the higher margin HA and surgical solutions businesses and the impact from the divestiture of the lower margin wound business. Looking more closely at our revenue performance for the quarter, across pain treatments, revenue growth accelerated 22 percent. Compared to the prior year as we maintained our double digit volume growth, primarily driven by Duraling, as expected we saw a sequential increase of price and expect this trend to continue throughout the year. As Rob mentioned, our strong execution is expected to drive growth above our earlier expectations for the year. In surgical solutions, revenue growth accelerated to 16 percent as both Ultrasonics and BGS generated double digit growth. With our recent growth, acceleration and surgical solutions, we are monitoring our supply chain closely and despite some recent shortages, we currently do not anticipate a meaningful impact in our projected growth. Shifting to restorative therapies, sales fell 16 percent, driven by the impact of our wound business divestiture, which accounted for 19 percentage points of the decline. On an organic basis, restorative therapies increased 3 percentage points driven by Exogen through our efforts to improve sales force execution and processing reimbursement claims more efficiently. Finally, our international segment grew 1 percent compared to the prior year and was even with the prior year when factoring in constant currency. Growth was driven by Duraling but was offset by the timing of shipments for Ultrasonics at the end of the quarter that are now expected to be recognized in the remaining three quarters. Moving down the income statement, adjusted total operating expenses rose nearly $4 million compared to the prior year. The increase primarily resulted from an increase in sales commissions due to revenue growth and improved employee retention, which was partially offset by savings from our wound business divestiture. Now turning to our bottom line financial metrics, adjusted operating income increased 49 percent to $20 million from $14 million in the prior year, while our adjusted operating margin of 15.5 percent advanced 410 basis points compared to 11.4 percent in the prior year period. Adjusted net income totaled $5 million and adjusted earnings per share were $0.07 for the quarter. This compares to a loss of $16 million or a loss of $0.26 per share in the prior year. The increase in adjusted EPS was driven by increased profitability in the current year and the impact of a non-cash valuation allowance against deferred tax assets resulting from the impairment of our divested wound business. Now turning to the balance sheet and cash flow statement, we ended the quarter with $25 million of cash on hand and $391 million of debt outstanding. We had $15 million drawn on our revolving credit facility at the end of the first quarter. As Rob mentioned, we drove our net leverage ratio below four times at the end of the quarter and from a liquidity perspective, we remain well within compliance with our net leverage and interest coverage covenants. With our expected reduction in debt and increase in EBITDA in 2024, we are now focused on reducing our net leverage ratio to around three times as we exit 2025. As planned, operating cash flow represented an outflow of $6 million due to the expected outflows related to employee annual bonus payments, most of our annual insurance costs, and the timing of contractual inventory purchases. These three outflows totaled over $13 million for the first quarter and are not expected to reoccur this year. Absent these outflows, operating cash flow would have been positive. Consequently, we expect cash from operations to accelerate in Q2 throughout the remainder of the year and our cash generation for 2024 is forecasted to be sufficient to meet the amortization requirements for our term loan. Finally, given the accelerated momentum in our business and increased expectations, let me update our 2024 financial guidance. Based on our team's solid execution of our business plan, we now expect net sales to be in the range of $535 million to $550 million. This represents a $15 million increase compared to our prior guidance of $520 million to $535 million. For the year, we expect adjusted EBITDA to now be between $94 million and $99 million. This represents a $5 million increase compared to our prior guidance of $89 million to $94 million. Finally, our guidance for adjusted earnings per share is now expected to be $0.25 to $0.33. This represents a $0.13 increase compared to our prior guidance of $0.12 to $0.20. There are two factors driving the increase in EPS guidance. First, our increased expectations for higher EBITDA and second, a reduction in our expectations for equity compensation for employees. In closing, our robust execution has generated a strong start to the year and we look to further enhance our revenue and adjusted EBITDA growth and drive improved cash flow through the remainder of the year. 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. Our first question will come from Chase Dickerbacher of Craig Hallam. Please go ahead.

Good morning, guys. Congrats on the great results here. First, I just want to dig in a little bit on the segment strength. When I look at ASPs in pain, particularly Duralaine, you improved sequentially, but kind of year over year there was still a bit down at least as reported with CMS. I know financial ASPs differ from the price file. Can you just help us back out? What was price in that year over year growth number versus what was volume? Because obviously, seemingly it was a very impressive kind of volume quarter.

Good morning, Chase. Thanks for your question. When we look at volume growth on Duralaine, really strong growth in that segment and the high double digits growth for that product. Again, just talk about our dedicated sales force that we have there. They're really executing very, very well. We also know the market's moving to single injection, which is in our favor given that we have the clinical differentiation in that product. So really proud of what the team's there, of what we've accomplished. We also, when we look into the future, we expect this to continue throughout the year in 24 and into 25. From a CMS perspective, again, had a slight increase in price and we expect that to continue to increase in 3Q as well when those are published in early June. So as we've talked about, we're focused on continuing to increase the price sequentially throughout the year. That's our expectations for 24. So the price headwind that you're referring to becomes less and less as we go throughout the year.

Got it. And then just to help us understand financial ASPs with you guys, when we talk about that sequential growth in financial ASP from here, is it mid-single digit quarter over quarter or just help us out there? And then just specifically on Jelson, have we seen that stabilized or we should see some improvement in the back half of the year too, fully realizing it's now a smaller piece of the model?

Yeah, when we look at the Q2 price that we're in right now, from Q1, Durallane increased about 6%, Jelson increased about 1%. When we look into Q3, we'll see a smaller increase on Durallane, I'd say in the 2% range from Q2 to Q3. And then when we look at Jelson, as you just talked about, that's going to be a big double-digit increase from Q2 to Q3, so we'll start to see that price move up. But I'll just remind you, I think that our growth is going to continue, we don't see these price increases as a headwind to our growth. Overall, when we look at our contracts that we have inside of the contracts, these prices are, as the ASP goes up, our prices increase within the contracts. And then we manage the price outside of those contracts with the sales team, and we've been managing those somewhat separately from the CMS, from an overall profitability growth and ensuring that we're pricing the products right to get that pull-through that has been a big part of the success that we've seen. One of the things in first quarter that the team executed that drove our growth was getting into the VA and, again, making sure that we have a pricing strategy outside of the contracts and also inside the contracts, and where the CMS price comes into play is really mostly in the contractual world that we live in.

Got it. That's helpful. Thanks. And then just maybe shifting gears to surgical, really impressive kind of acceleration of growth there. Can you kind of talk to what drove specifically around BGS in the quarter? Was there anything from a supply perspective in the market that kind of benefited you guys, or was this kind of true demand that you kind of would expect to kind of hold on to through the year, and then kind of along those lines? If we think about kind of low double-digit growth there, that would imply kind of a little bit of a step down kind of through the year, just because we had an easier compare in Q1.

Hey, Chase. This is Rob. I'll start off, and then Mark can feel free to chime in. So that was true demand that was generated by our team during the quarter. I feel really good about the continuation of our strategy there to have dedicated focus on that business, and we're seeing the impact from that. And then in terms of going forward, we were really optimistic about this business as reflected by our comments on overall surgical solutions. And just in terms of guidance, we're just going to be measured in our approach on this, make sure that we have line of sight to the growth that we're generating from the initiatives that we're putting in place, but feel good about it, which is why we said surgical solutions will drive that double-digit growth for the rest of the year.

Makes sense. And then just lastly, Mark, when we look at gross margins, kind of well ahead of our expectations, now that we've got kind of surgical returning to growth, pain, very healthy, should we be modeling kind of mid-70s, just the gross margins kind of from here in the model or anything we should think about as we kind of go through the year here?

Yeah, Chase, thanks for the question. I guess, one, I'll just start, Rob mentioned this in his script, but our gross margin, we do a lot of peer analysis. I know you all do as well. And we can hold our gross margin up to any of our peers. Whenever you do peer analysis, whatever your choice is, we're always in either the leading company with the highest gross margin or in the top two or three. So really good margin that we have. And then if we continue to drive the growth that we're projecting and that we did in first quarter with that high of a gross margin, it's really going to allow us to come through and drive a lot of leverage in the P&L, again, as we saw in the first quarter. So we feel really good about our margin, our industry-leading gross margin. But when we look from a -to-year perspective, again, I think that we would look for that to be in the 74% range, pretty much kind of flat from 2023. First quarter was a little bit higher in the 76 range, really pretty much had like perfect optimal product mix. And some of that will weaken a little bit, but still be very strong, again, in the mid-70s mix. It's very, very competitive against the market and our peers.

Great. Impressive results, guys. Congrats on the application.

Jason.

The next question comes from Robbie Marcus of JPMorgan. Please go ahead.

Great. I'll echo. Thanks for taking the questions and congrats on a very nice quarter. Two for me. Maybe first, now that all the reimbursement headwinds have lapped in the AHA business, what do you see the underlying growth as? And what's your competitive share of the year-plus as the kind of the revenues have been obscured?

Thanks. Yes. Robbie, just to make sure I can hear your question in line with breaking up a little bit, we were really looking at the underlying growth and then the share that we have?

Yeah, exactly.

Yeah. I think, you know, so if we look at our share over the last year, we've really accelerated the share from a revenue perspective, but even more so from a unit perspective. So our gain in revenue hasn't been quite as much as it has been in volume because of the CMS pricing headwinds that we have, but I would just say that those are behind us. We have it, you know, well under control and understood and, you know, have a really detailed processes around, you know, our expectations of what we, the team does a great job of analyzing and understand that. So, you know, we look at, you know, the revenue share, we, you know, exiting last year and into this year, we're looking at a 25% range roughly, you know, based on some of the sources that we have. We look at our underlying growth, you know, in first quarter, we drove about, you know, 22%. You know, last year we were slightly positive growth for the full year, but had a really strong fourth quarter growth. And when you look at our growth for the rest of the year on HA, we're really looking at the high single digits to, you know, double digit growth going forward. So the headwinds, just want to emphasize from a CMS and reimbursement is well behind us. And we feel, again, really well positioned with the sales force we have, the contract position and the market moving into sterling and the single injection space and just the great execution that our sales force continues to deliver quarter after

quarter. Great. And one more, you had very good expense control in the quarter. You know, after a couple years of tight expense control, maybe just speak to, you know, employee turnover, employee morale, and the ability to keep the expenses low because it was pretty impressive in the quarter. Thank you.

Hey, Robbie. This is Rob. Thanks for joining. I'll take that one first. And, you know, we did have good expense control in the first quarter, but there is much greater opportunity for us going forward. I mentioned this is a key lever that we can pull, not just in generating accelerated revenue and then that pivotal high gross margin that we have, but then on top of that, reducing costs to either drop them to the bottom line or to invest in initiatives that have a higher ROI. When we look at the first quarter, you know, one of the things that we're doing is we're being really diligent and thoughtful about where do we want to spend in order to drive that high ROI. So some of the spend from the first quarter, you know, will shift into other quarters as we develop our strategic plan and determine what those best areas are. So good expense control, but I'd say even more opportunity going forward, even while we're considering investing in some areas to drive, not just to build the fundamentals of the company, but drive more transformational growth going forward. So thanks for calling that out.

Yeah, just to add to Rob's comments about, you know, we're being very selective about whatever investments that we are going to make and making sure that we have a high return on investment when we do make those. And Rob's brought, you know, a really good disciplined perspective to the table and challenging the team on reallocating, you know, dollars to higher return and things like MedEd and things like that. So, you know, continue to improve our approach and discipline around this, I'd say, and we'll continue to improve that as we go through the year.

Thank you. The next question comes from Caitlin Cronin of Canal Corps Genuity. Please go ahead.

Hey, thanks for taking the questions and congratulations on the impressive quarter. It seems like commercial execution is improving across the business. Could you provide some more color on how this momentum is building and for, you know, surgical solutions specifically, how are the distribution changes, you know, continuing to affect?

Hey, Caitlin, this is Rob. Thanks for joining. Yeah, you know, I think our commercial execution is coming along nicely. I'd say overall the organization, not just within surgical solutions but across, is responding really well to the opportunities that we have ahead of us. And where we saw this in the first quarter and expect it to continue is much stronger strategic focus and disciplined execution on the priorities that we've established. So that's the key there in terms of that commercial focus and execution improving. And again, we'll continue to build on that through the rest of the year. And then the second part of the question, I'm sorry, Caitlin, was on surgical.

Yeah, just the surgical solutions specifically, how the distribution changes you made last year, how those are continuing to improve in the business.

Yeah, yeah, it's working quite well in continuation of what we shared last time. So there's, you know, by having that dedicated focus from a distribution standpoint, we're seeing more disciplined execution both on the ultrasonic side of the business and BGS, and that's reflected in the results that we shared as well as the guidance for the rest of the year. So we feel pretty good about that and we'll continue to build on it moving forward.

Yeah, and just, Dad, when you look at the growth there back to Rob's comments, I mean, you did a lot of work on bringing in new distributors in the back half of the year last year, and those are really starting to contribute in the first quarter. And then we're getting better than expected, you know, pull through from our legacy distributors as well. So just empathizing, you know, Rob's points and definitely, you know, really good execution by that team in the first quarter as well.

Awesome. And then, you know, just on Exigen, congrats on the MDR. Any updated expectations for Exigen and or your OUS business going forward?

Yeah, you know, Exigen is a great business for us. We have such brand, strong brand equity in this business. When Mark and I are out in the field meeting with customers, it's inevitable that an enthusiastic clinician approaches us and tells us about the phenomenal results that they've seen with patients. And, you know, of course, it's one of our focus areas across the globe, and securing MDR just allows us to build on that business in Europe. So I feel good about continuing to not just turn around that business has been the focus in the past, but now growing it into the future.

Great. Thank you.

Thank you.

This concludes our question and answer session. I'd like to turn the call back over to Rob Claypole for any closing remarks.

All right. Thanks, everyone, for your interest in BioVentus. We drove a significant improvement across our business in Q1, and we look to build on our momentum with stronger execution as we focus on our mission, on accelerating revenue growth, profitability, and cash flow, and on creating shareholder value. Thanks for joining.

Thank you. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.