Bioventus Inc. Q2 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2021 Earnings Conference Call for Bioventus Inc. At this time, all participants have been placed in a listen-only mode. Please note that this call is being recorded, and that recording will be available on the company's website for replay shortly after the end of the call. 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 Securities and Exchange Commission, including Item 1A of the company's Form 10-K for the year ended December 31, 2020, as well as our most recent 10-Q filing to be filed with the Securities and Exchange Commission. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although the company may voluntarily do so from time-to-time, it 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 generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Definitions and reconciliations of these 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 portions of our website at www.bioventus.com. I would now like to turn the call over to Mr. Ken Reali, Bioventus' Chief Executive Officer. Sir, please go ahead.

Well, thank you, Katherine, and welcome, everyone, to Bioventus' second quarter 2021 earnings conference call. I'm joined on the call today by Greg Anglum, our Chief Financial Officer. Let me provide you with a brief outline of what we intend to cover. I'll start by discussing our second quarter revenue performance and business trends, followed by an update on our operating progress and key highlights in the quarter and in recent months. After my opening remarks, Greg will review our financial results for the second quarter of 2021 and our financial guidance for the full year 2021, which we updated in our press release this afternoon. Following that, we will open the call to take your questions. Turning to a brief review of our second quarter results, we are pleased to report second quarter net sales of $109.8 million, up 89% year-over-year, exceeding the expectations we provided on our Q1 call, which assumed growth in the range of 67% to 74% year-over-year. Our second quarter revenue exceeded the midpoint of this guidance range by roughly $11 million or 19 percentage points of growth year-over-year. Needless to say, we are extremely proud of the Bioventus team and the strong growth performance we delivered in the second quarter. We believe our second quarter results were driven by our team's ability to build upon the momentum we saw coming out of the first quarter and importantly reflect strong organic growth overall and improving growth trends quarter-over-quarter. Specifically, our second quarter revenue results reflect organic growth of 15% as compared to the second quarter of 2019, driven by strong organic growth versus 2019 in the U.S. of 18%. While we are very pleased with this growth performance, we are even more encouraged by the fact that our growth trends over 2019 accelerated quarter-to-quarter, reflecting improvement in the overall operating environment during the period. I would be remiss if I did not mention the other key contributor to the better than expected revenue results reported in Q2, which is a strong growth performance from our recent acquisition of Bioness. We are very pleased with the progress we have made in the first 100 days post-closing, and we believe the strong execution of our integration plan helped us deliver above-plan revenue contribution from Bioness in Q2. I'll share a little more color on our integration efforts later on the call. But for now, let me just say that we are proud of the early evidence that our inorganic business development strategy and execution-driven plans in integrating new companies quickly and efficiently is working. Diving a little deeper into the drivers of our growth performance in Q2, for the avoidance of doubt, all growth rates referred are relative to the second quarter of 2019, in the interest of stripping out any benefit to our growth performance from an easy comparison. Our organic growth of 15% in Q2 was driven by 18% growth in the U.S., which more than offset mid-single-digit declines in our international sales. By global vertical, our organic sales growth versus Q2 2019 was driven primarily by 19% growth in sales of pain treatments and joint preservation products led by 81% growth in global sales of our flagship single injection HA product DUROLANE and 59% growth in global sales of our bone graft substitute products, offset partially by a 13% decline in global sales of our restorative therapies products. As mentioned earlier, we are encouraged by the continued evidence of recovery from the pandemic that we are seeing in our global verticals, particularly in our pain treatment and joint preservation products, which posted high single-digit growth over 2019 in the first quarter, and 19% in Q2. The overall environment continues to improve, and we are confident in the 26% to 29% net sales growth we now expect as outlined in our updated guidance for full year 2021. We continue to expect measured improvements in the operating environment as we move through 2021, fueled primarily by the increase in the availability of vaccines and an increasing percentage of vaccinated Americans, as well as Canadians and Europeans. And we continue to expect a return to normalized year-over-year growth trends in the third quarter of 2021. Turning to a review of our operating progress and recent highlights. First, our integration of Bioness is progressing nicely. We are on target to have the integration largely completed by year-end. By all indications, we believe the acquisition of Bioness checks many boxes as it relates to what we believe to be an ideal inorganic business development opportunity. It is a substantial commercial business serving large global and growing market opportunities with attractive growth that is accretive to our long-term growth profile. Bioness offers product solutions that align perfectly with Bioventus' existing product portfolio. We believe this acquisition will allow us to leverage our significant competitive advantage in our expansive direct sales and distribution channel, which provides us with broad and differentiated customer reach and allows us to serve physicians spanning the orthopedic continuum, including sports medicine, total joint reconstruction, hand and upper extremities, foot and ankle, podiatric surgery, trauma, spine, neurosurgery, podiatrists, and pain physicians. We also see opportunities to leverage our significant experience commercializing high-value durable medical products. We expect our reimbursement team to drive improving reimbursement in order to cash performance for the Bioness business in the years to come. As we continue to execute our integration strategy in the coming months, we will be working closely with the existing Bioness peripheral nerve stimulation or PNS sales force to expand the market penetration of StimRouter through our large sales team and market access team and also prepare the market for the less invasive, fully implantable, Talisman PNS device expected to be coming next year, based on potential clearance in 2022. We have also started a pilot with our sales team in the restorative therapies business to introduce StimRouter to lower extremity clinicians that are currently prescribing EXOGEN. Bioness' neuromodulation technology is highly differentiated, patent-protected, and ideally suited to treat pain in the periphery with established reimbursement coding. The StimRouter is the only PNS device today with an RCT and is well positioned as it is a less invasive alternative to other modalities, while also avoiding the negative effects of opioid use. We look forward to sharing more updates on our integration progress in the coming months. Two other operating highlights of note: we launched a new product in our bone graft substitutes business, and we welcome a new member to our Board of Directors. Building on a successful limited launch in Q1, we entered full commercial launch of our OSTEOAMP flowable in July. OSTEOAMP flowable is an injectable allograft bone graft substitute solution developed for a variety of patient procedures, including lumbar spine fusion, cervical spine fusion, and foot and ankle fusion. We have been extremely pleased with the early market response to this differentiated product and look forward to its increasing contribution to our bone graft substitutes vertical in the years to come. Most importantly, OSTEOAMP flowable, due to its injectable format, can be used in minimally invasive spinal fusions, the fastest growing area in spine. Also in July, we announced the appointment of Mary Kay Ladone to the company's Board of Directors. Mary Kay is an accomplished executive serving large global healthcare companies over her more than 30-year career. We are very pleased to welcome Mary Kay to our board, as she will provide valuable experience and insights as we execute our strategy of growth acceleration through new product development and M&A. Her global financial strategic planning and business development experience, as well as her strong track record of leading best-in-class investor relations programs, will be invaluable to Bioventus. Before turning the call over to Greg for a review of our financial results and updated guidance, I want to share some thoughts on two items of note in recent weeks. On July 29, we announced that Bioventus Misonix entered into a definitive agreement under which Bioventus agreed to acquire Misonix in a cash and stock transaction. Misonix stockholders will receive aggregate consideration that values Misonix at approximately $518 million on a fully diluted basis based on Bioventus' seven-day volume weighted average stock price, or VWASP, of $16.6284 per share as of July 27, 2021. As outlined on our call on the 29th, we see this acquisition as a strong strategic fit. Given that Bioventus is a company focused on building a portfolio of clinically differentiated minimally invasive treatments to help patients heal faster and relieve pain. Across a $13 billion addressable market opportunity, we are the number two player in HA therapy with the fastest-growing single injection therapy. We are the number one player in minimally invasive fracture treatment and advanced rehabilitation. We are the fastest growing participant in bone graft substitutes, and we are the technology leader in peripheral nerve stimulation. We believe the acquisition of Misonix represents a compelling opportunity to extend our leadership and expand the breadth and depth of our offerings by adding $2 billion to our addressable market. We believe the complementary nature of the two businesses will give the combined company significant diversity and scale across a range of care settings, geographies, and therapeutic areas. The combined product portfolio following the closing will serve large market segments across orthopedics, spine, and lower extremity, as well as neurosurgery. Together, we believe these factors will place Bioventus in a unique market position, with leading technologies and specialized sales forces numbering over 500 sales reps serving a $15 billion total addressable market across the hospital, ambulatory surgical center, and office care settings. We believe the combination of our two businesses will create a differentiated growth medical technology company. And importantly, we believe it will enhance our long-term growth profile to the tune of approximately 100 basis points of additional revenue growth to the combined company on a pro forma basis. We strongly believe the enhanced growth profile, combined with Bioventus' expected $20 million of cost synergies, will create strong financial returns for Bioventus shareholders. We are clearly excited by the opportunities in store for the combined companies and look forward to the close, which we expect to continue in the fourth quarter and officially welcoming the Misonix employees to Bioventus. In terms of our near-term milestones for the investment community to monitor in the coming months, Misonix is planning to file their 10-K for the 12 months ended June 30, 2021, in early September, and is targeting the filing of an S-4 a couple of weeks later. We have designated a team to lead the integration, and planning is already underway. We expect to be prepared to hit the ground running as soon as the transaction closes in the fourth quarter. Finally, I want to provide a brief update on a recent clinical milestone for Agili-C, a pipeline product for Bioventus via an equity investment in a privately held company named CartiHeal. Agili-C is an off-the-shelf scaffold implant that is designed to regenerate hyaline cartilage and subchondral bone simultaneously. The Agili-C implant has been implanted in more than 190 patients outside the United States with follow-up of more than four years and has CE marking. The product was granted breakthrough device designation by the FDA last year and recently announced high-level results from a two-year randomized and controlled pivotal IDE study. The study's objective was to demonstrate the superiority of the Agili-C implant over the surgical standard-of-care: microfracture and debridement for the treatment of cartilage or osteochondral defects in both osteoarthritic knees and knees without degenerative changes. We estimate this to be a $1.3 billion market opportunity. This is a noteworthy clinical milestone given our equity purchase agreement with CartiHeal. As disclosed in our SEC filings, the agreement provides us with an exclusive option to acquire 100% of CartiHeal’s shares upon pivotal clinical trial success, including the achievement of certain secondary endpoints and FDA approval of the Agili-C device with a label consistent in all respects with pivotal clinical trial success. Consideration for the acquisition of all the shares of CartiHeal would be $350 million, with an additional $150 million payable upon the achievement of certain sales milestones related to Agili-C. On August 2, 2021, CartiHeal provided us with a statistical report containing the results of the pivotal clinical trial. We are currently reviewing the report to assess if it is consistent with the terms of the agreement. We have the right to terminate our option agreement at any time within 30 days after receipt of this statistical report from CartiHeal, upon payment of a breakup fee of $30 million. If we decide to move forward with CartiHeal, we will be required to put $50 million into escrow as a deposit towards the $315 million of consideration owed following the receipt of PMA approval. We are not able to discuss the clinical study results or the statistical report at this time, but we intend to announce our decision regarding the equity agreement via a press release. Some notes to bear in mind regarding our CartiHeal relationship. First, if we decide to move forward with CartiHeal, we have an option to acquire the company, but not until Agili-C receives PMA approval. Second, CartiHeal submitted the PMA non-clinical module and the manufacturing module to the FDA earlier this year and continues to expect the submission of the final clinical module in Q4 of '21. Third, our expectation regarding the potential timing of any acquisition of CartiHeal has not changed. We continue to expect the earliest post-PMA approval acquisition would come is mid-2022. Fourth, we believe we have the requisite capital to execute our strategic growth initiatives for the existing Bioventus business to finance our transaction with Misonix and to continue to invest in our product pipeline, including Agili-C. With that, let me turn the call over to Greg for a detailed review of our financial results in the second quarter of 2021, as well as a review of our updated 2021 financial guidance.

Thank you, Ken. For the avoidance of doubts and unless otherwise noted, my commentary will focus on the company's non-GAAP results for the second quarters of 2021 and 2020. We've included definitions and full reconciliations from our GAAP reported results to the related non-GAAP item in our press release this afternoon. Turning to a review of our second quarter financial results. GAAP net sales increased by $51.8 million or 89% year-over-year on a reported basis and increased 88% on a constant currency basis. Gross profit increased $38 million or 84% year-over-year and represented 76.5% of sales compared to 78.7% of sales in the prior year period. The year-over-year change in gross margin was driven primarily by the mix of revenue by geography and by vertical as compared to the prior year period. Note that our gross profit excludes non-cash amortization expense of $5.6 million for the second quarter of 2021 compared to $5.3 million last year. The gross profit for the second quarter of 2021 also excludes $2.1 million of inventory step-up costs related to our acquisition of Bioness. Total operating expenses increased by $31.3 million or 79% year-over-year to $70.8 million. The change in total operating expense by line item was driven by a $29 million increase or 79% year-over-year in SG&A expense, and to a lesser extent, a $2.2 million or 86% year-over-year increase in R&D expense. The increase in operating expense compared to the prior year period was primarily driven by investments in our selling and marketing organization, public company costs that did not impact the prior year period results, and the resumption of discretionary spending, including travel and related expenses, given the more normalized business environment as compared to the significant cost reduction efforts in the prior year period as a result of the COVID-19 pandemic, as well as operating expenses related to our acquisition of Bioness, which did not impact the prior year period. As detailed in the non-GAAP reconciliation tables in our press release this afternoon, we exclude non-cash amortization, acquisition costs, and other non-recurring costs from our non-GAAP operating expense. The second quarter operating expense also excludes two non-cash items that did not impact prior year period reported results, specifically a $0.6 million of non-cash expense related to the change in fair value of contingent consideration and $5.7 million of non-cash charges related to impairment of assets related to harbor on which $5.2 million was attributable to non-controlling interest. Operating income was $13.3 million, compared to operating income of $6.2 million for the second quarter of 2020, an increase of $7.1 million or 113% year-over-year. Operating margin was 12.1% of net sales, compared to 10.7% of net sales in the prior year period. In summary, our performance across the P&L in Q2 resulted in non-GAAP net income of $9.6 million, up 168% year-over-year, and adjusted EBITDA of $19.9 million up 186% year-over-year. As detailed in the non-GAAP reconciliation table in our press release, adjusted EBITDA excludes the impact of stock compensation expense and other non-cash or non-recurring items, which we believe provides supplemental information about the underlying operating performance of our business. Turning to the balance sheet, as of July 3, 2021, the company had $136.1 million in cash and cash equivalents and $181.1 million in debt obligations compared to $86.8 million in cash and cash equivalents and $188.4 million in debt obligations as of December 31, 2020. As of July 3, 2021, we had approximately $50 million of available borrowing capacity on our revolving credit facility. Turning to a review of our fiscal year 2021 financial guidance, which we updated in our press release this afternoon. For the avoidance of doubt, our updated 2021 financial guidance includes the contributions from our acquisition of Bioness following the closing date of March 30, 2021, but does not include contributions from the proposed acquisition of Misonix, which was announced on July 29, as it is yet to close. The company expects to update its 2021 financial guidance to include contributions from Misonix following the closing, which is expected in the fourth quarter of 2021. For the 12 months ending December 31, 2021, the company is reaffirming the updated revenue guidance provided in our preliminary second quarter revenue results press release on July 29, which called for net sales of $405 million to $450 million, up approximately 26% to 29% year-over-year. The increase in our net sales guidance range is driven by the stronger-than-expected sales results in the second quarter of 2021. The updated net sales guidance range assumes net sales from legacy Bioventus Inc. of $372.5 million to $380.5 million, representing organic revenue growth in the range of approximately 16% to 18% year-over-year, and net sales from the acquisition of Bioness Inc. of approximately $32.5 million to $34.5 million. With respect to our profitability guidance, we now expect GAAP net income of $13.0 million to $17.6 million, of which legacy Bioventus is expected to contribute GAAP net income of $29.2 million to $33.3 million, with Bioness contributing the remaining balance. We now expect non-GAAP net income of $67.1 million to $69.5 million, of which legacy Bioventus is expected to contribute non-GAAP net income of $75.6 million to $76.6 million, with Bioness contributing the remaining balance. We now expect adjusted EBITDA of $77.8 million to $82.0 million, of which legacy Bioventus is expected to contribute adjusted EBITDA of $82.8 million to $86.1 million, with Bioness contributing the remaining balance. In addition to the formal financial guidance provided in this afternoon's release, we would like to provide some key assumptions to bear in mind when evaluating our growth expectations for 2021. First, our full-year 2021 net sales guidance range assumes the following for net sales by geography: U.S. net sales growth in the range of 23% to 26% year-over-year, and international net sales growth is expected to be in the range of 55% to 60% year-over-year. These ranges assume U.S. sales growth on an organic basis in the range of 15% to 18% year-over-year, and contributions from our acquisition of Bioness and international sales growth on an organic basis in the range of 22% to 24% year-over-year, as well as contributions from our acquisition of Bioness. For net sales by vertical, our full-year 2021 guidance now assumes low-to-mid 20% growth in global sales of pain treatments and joint preservation products driven by low 20% organic growth and contributions from Bioness, low-to-mid 30% growth in global restorative therapies growth driven by low-single-digit organic growth and contributions from Bioness, and high 20% to low 30% growth in global sales of BGS products. Second, we continue to expect to see measured improvements in the operating environment as we move through 2021 fueled by the increasing availability of vaccines and an increasing percentage of vaccinated Americans, Canadians, and Europeans. Our full-year 2021 guidance continues to assume a return to normalized year-over-year growth trends in the third quarter of 2021. Finally, with respect to our expectations for financial performance in 2021, we would like to provide some of our assumptions to help evaluate our full-year 2021 guidance for GAAP and non-GAAP net income. For the full-year 2021 period, we expect non-GAAP gross margins of approximately 77.6% to 78.1%. GAAP operating expense growth of 23% to 26% year-over-year, driven primarily by the incremental operating expenses related to our acquisition of Bioness, and low double-digit growth in legacy Bioventus operating expenses compared to 2020. Note that the increase in GAAP operating expense growth range versus prior guidance is driven by the non-cash impairment charges and non-cash expenses from contingent consideration in the second quarter of 2021. We also expect interest expense net of approximately $2.3 million total non-cash depreciation and amortization of approximately $31 million to $32 million, along with non-cash stock comp income of approximately $2.7 million to $3.7 million, and weighted average diluted Class A shares of approximately $42 million. With that, I'll turn the call back to you Ken.

Thanks, Greg. Before opening the call for Q&A, I want to summarize the main points of the Bioventus investment story, which I believe will illustrate why we are so enthusiastic about the long-term outlook for the company. Number one, we are a company focused on building a portfolio of clinically differentiated minimally invasive treatments to help patients heal faster and relieve pain. We are confident in our multi-year organic growth profile, which is increasingly compelling and fueled by our market penetration strategy in both our pain treatment and joint preservation, as well as bone graft substitutes verticals, while expanding our reach in our restorative therapies vertical. Number two, our product pipeline is robust and is expected to fuel accretive growth in the medium term with potential products like Agili-C by CartiHeal, MOTYS, and PROcuff, and Talisman, the implantable less invasive PNS device from Bioness. Number three, our M&A strategy is designed to bring in acquisitions that are expected to bring accretive growth to our global business and leverage our strong commercial infrastructure to facilitate consistent double-digit growth. As discussed, our acquisition of Bioness in March and our recently announced pending acquisition of Misonix represent ideal fits in terms of how our M&A strategy will enhance our long-term growth profile and create further value for our shareholders. Importantly, we will continue to be measured and prudent in our approach to M&A as we have with both the Bioness and Misonix deals. Number four, operationally, we are focused on continuous improvement to positively impact our margins, including cost savings initiatives from a manufacturing and supply chain perspective while also enhancing our quality programs to meet ongoing changes in our regulatory environment. And number five, and most importantly, our strategy is backed by a highly engaged, results-driven culture that is fueled by an employee-driven mission to improve the lives of the thousands of patients that are treated each day by one of our medical devices, returning them to active lives. With that, we'll open the call to take your questions. Katherine?

Thank you, sir. We ask that you limit yourself to one question and one follow-up. We will take a moment to allow participants to join the queue. Our first question comes from Robbie Marcus of JP Morgan. Please go ahead with your question.

Great. Thanks for taking my question. Maybe we could start on the outlook. I think people are getting very concerned about the impact of COVID and the Delta variant, particularly in the southeast, with some hospitals in Texas and Florida and other states starting to put-off elective procedures. It doesn't sound like the guidance necessarily assumes a worsening of the situation. So, it would be great to get your take on what you're seeing right now in the U.S., particularly in the southeast? Are you seeing an impact so far in the third quarter from the rising cases? Thanks.

Yes, thanks. Robbie, good to hear your voice, and thanks for your question. That is a concern, and one that we're watching carefully. At this point in time, it is not impacting our business. Keeping in mind that Bioventus is broadly diversified geographically across the United States, where we sell in a given month to thousands of surgeons across our three verticals. That really helps us where we may have some regional spikes, which is I think what we're seeing with the Delta variant, whether it’s some impact on elective procedures, but we're broad enough based at this point, where we have not seen an impact. We're obviously continuing to watch that carefully. But our guidance assumes we'd return back to normalized growth in the second half of this year.

Got it, okay. So it doesn't seem like it's really impacting you from second quarter trends at all, in a material way?

No, no, it's not Robbie. Hopefully, that will continue for us.

Yes, thanks, Robbie. Our M&A strategy, as we've talked about, since we went public earlier this year, is not to drive growth for growth's sake with M&A, but really look at it from a strategic perspective and make sure it aligns and leverages our commercial channel. We've been fortunate to find two excellent acquisitions in 2021 in Bioness and the pending acquisition with Misonix. We will continue to look at other M&A. And we'll take a prudent and measured approach. The potential deals, if we go that far, are ones that will return value to our shareholders. That will be a key measurement device. We have assessed carefully where we stand relative to the Misonix and completing that acquisition, which we expect to close in the fourth quarter, and then CartiHeal, and as highlighted on the call, we don't expect CartiHeal, if we do move forward, to receive PMA approval until mid-2022, which puts quite a bit of daylight between the close of Misonix and the CartiHeal deal. So, we are in a strong position with low debt and high, not leveraged, but very strong cash that drives down to our bottom line every month. So, we'll continue to certainly look at our M&A pipeline and look at opportunities that drive accretive growth. But as we've done in the past, it'll be a measured and prudent approach. And we just have, in our case, some very good synergies that we've been able to take advantage of here in the near term with both Bioness and with Misonix, and we're clearly excited about CartiHeal. And we'll be assessing that technology, and as mentioned, are in the process of doing that right now. Great. Maybe if I could sneak in one more. Now that you've had some time to digest the acquisition, at least since the announcement a couple of weeks ago, any updated thoughts on accretion for the first year and the second year on adjusted EBITDA and how that impacts net income? Thanks.

Yes, Robbie, it's Greg. I'll take that. With respect to Misonix, I don't think there's any updated thoughts at all as we said at the time of that announcement. We expect that acquisition to be accretive to our adjusted EBITDA in the first full year after the completion of the transaction and accretive to our adjusted EBITDA margins by the second full year after completion, and really no change to that from what we said at that point. Thanks.

And, sir, our next question comes from Amit Hazan of Goldman Sachs. Please ask your question.

Hey, this is Phil on for Amit. Can you guys hear me? Okay?

We can, Phil.

Awesome. I wanted to circle back to Delta and maybe a slightly different way that Robbie asked that and ask about patient risk aversion, kind of independently of constraints on facilities and hospitals. So I'm wondering what your learnings were on patient risk aversion over the last roughly year 18 months? And how you're thinking about that moving forward? And any differences that you see in different divisions? Obviously, there's slightly different dynamics between the different segments that you guys operate on?

Yes, it's a great question, Phil. And let me try to answer it by the verticals. Most of our data will be U.S.-faced, but certainly, I will reflect on some international points as well. First of all, on our HA therapy in our pain treatments area in that vertical, we saw last year reticence to go into physician offices, keeping in mind that that particular population with HA is elderly people, or people over the age of 65 and sometimes quite a bit older. We've seen a full return to our HA business as the vaccines became available late last year and early this year. And as you can see from our results, we continue to see continued strong growth in that area and continue to gain market share in the HA space in general. EXOGEN is more of a broad-based technology and our restorative therapies area. That area was impacted throughout 2020 because of the reduced activity level and reduced trauma, and then we've seen a consistent pickup across the back half of 2020 and into 2021. I don't expect that to be impacted, because that's more trauma-related, and as long as people continue to remain active and we don't have shutdowns, the impact of a Delta variant will not be extensive on that restorative therapies area of EXOGEN. And for that matter, on the advanced rehabilitation area with Bioness, I would say the same thing. Where there's more stroking and focus at this point, I don't expect a significant impact there, unless there would be some type of significant shutdown. And then we're going to our bone grafts substitutes area, which is more of a younger patient group in spinal fusion. That can vary in age from 50 to 70 typically, and we have not seen a decline in elective procedures. As I mentioned, Phil, there may be some regional pressure on occasion, depending on the area where there might be spikes. But we're broad enough based with that business that we have been fortunate; we have not seen any real impact to our growth profile. For peripheral nerve stimulation with StimRouter, it's really the same thing. Right now our focus is on post-surgical pain and some chronic lower extremity pain. We have not seen an impact there. Again, we would have to see a significant shutdown to see PNS impacted. Now, where we have seen an impact with the pandemic has been more internationally where we are direct in the U.K., Canada, and Germany. We have seen a much more significant impact, as you can see from our numbers. They are rebounding, though, and we expect in the second half of the year with continued vaccination growth that patients will return to normal treatments in those markets, as well as our distributor markets outside of those three direct markets. We continue to stay positive on that mentality.

All right, thanks. Thanks for all that color. That was great. One more, if I may, the EXOGEN system. I think growth, if you look at it, kind of on a compound basis, slowed sequentially versus Q1. I'm wondering what happened in the market there. Obviously, we had some things going on in Q1 that I think could have actually slowed growth on that side. So what happened in Q2, and what gives you confidence in the reacceleration that's implied in guidance for that business? Thanks.

Yes. Thanks, Phil. Just to be clear, we did see sequential growth in EXOGEN from Q1 to Q2, and we're very pleased with that. So, from our perspective, EXOGEN, we continue to expect low-to-mid single-digit growth with the product. We continue to be strongly optimistic on EXOGEN to deliver from a profitability perspective. So, as far as we’re concerned, we've continued to see really good numbers there and encouraging results. As I mentioned, we did find that EXOGEN was hit last year, particularly from the reduction in trauma. However, we've seen a pickup and we've seen good sequential growth from Q1 to Q2 now.

Right. Thanks, I'll get back to you.

And our next question comes from Drew Ranieri of Morgan Stanley. Please ask your question.

Hi, everyone. Thanks for taking my question. Just going back to the third quarter for a moment, just to your comments that you're expecting a return to normalized year-over-year growth trends in the third quarter. It looks like consensus has about $102 million for the third quarter. But if I kind of look back and maybe what your normalized growth rates would have been, it seems like we might be coming out to like $95 million to $98 million. Just curious if you're comfortable with where consensus currently stands, just kind of given the trends that you're seeing in the business and variants.

Yes, Drew. Thanks. It's Greg. And short play version is we've said all year long we expect to get back to normalized growth in the second half. We continue to say that. If you go back and look at our business historically, Q2 to Q3, our business stays relatively constant, with maybe some shifts, but our business builds from the first quarter to the fourth quarter. It is relatively constant from Q2 to Q3. So we remain very positive in terms of our outlook for the rest of the year.

Okay. And then I'll put these two questions together, but can you maybe talk a little bit more about the pilot program between StimRouter and EXOGEN? And then second, just give us a pipeline update for bones and MOTYS? Thank you.

Sure, Drew. First of all, the pilot program was something we launched several months ago with our sales team that sells EXOGEN and specifically calls on lower extremity surgeons, foot and ankle orthopedic surgeons, and podiatric surgeons, where there is a real need for peripheral nerve stimulation, depending on the procedure and the area that we are treating. As we brought the team in, and it was 25 of our sales reps, a small percent. That's gone quite well as they've gone out in the field. They've been trained, working closely with the Bioness peripheral nerve stimulation sales force. So we're very excited about that opportunity. It's an initial focus for us just to gain market experience and have our reps gain experience and confidence with a StimRouter product. From our perspective, we look forward to a full launch across our broader sales force in this area going into 2022. Obviously also, the next generation Talisman product, which we also expect 510-K clearance on and availability with that in 2022 as well. As far as bones, there's not a lot to update on at this point. As highlighted before, we have a deficiency letter from the FDA on the metatarsal study. We are in discussions with the FDA and expect to continue to work to resolve the deficiency letter. This is a PMA supplement that does take some time as the team works through that. So we'll have updates as we get them. Better material in that area. Regarding MOTYS, we continue to work through our Phase 1 study, and it's now two sites in the U.S. We're also ready to commence our Phase 2 study on schedule in the third quarter. So, we are very excited about what that product represents, and the strong adjacency we see in our HA portfolio with MOTYS as a placental tissue product that can have disease-modifying implications, as well as reduce inflammation in the knee joint. So that continues to really progress nicely, and our team has done a terrific job moving that forward via the BOA application process.

Thanks for taking the question.

Thanks, Drew.

And our next question comes from Kyle Rose of Canaccord. Please ask your question.

Great. Thank you very much for taking the questions. So I wonder if we could just ask more of a bigger picture M&A question. I understand that your appetite for continued M&A remains strong. When I look at the two deals that you've done, one pending and one closed, they're a bit more tangential than I think maybe we would have expected, broadening into the wound care market, as well as more on the operative side of the spine market. Then when I look at Bioness, you've got multiple different market segments that you're broadening into. Do you expect to continue to move into additional adjacent market segments or more so than invest in the existing markets that you're in now?

That's a good question, Kyle. When you look at the segments that we're in, these are highly adjacent areas, which is why we did them and they leverage our commercial channel and the infrastructure that the company has. If you start with Bioness, we're using our current sales force. Obviously, it's just a pilot right now, but we will continue to penetrate the peripheral nerve stimulation market, which is significant considering the opioid crisis and the use of opioids post-surgery. These are all physicians and surgeons that we call on daily. So leveraging that has been critical, and then on the advanced rehabilitation business, there's an operational synergy as well as a commercial synergy operationally with the durable medical equipment and that process that we have well-honed with EXOGEN. Moreover, commercially expanding their gait restoration products to use in osteoarthritis, we will use our sales force to go in that direction where we see a lot of great synergy. With Misonix, it is essentially the same strategy: going deeper with what we have, starting with spine, the unique strategy that we have been agnostic to spine hardware and leveraging our bone graft substitutes across a broad portfolio of opportunities and hospitals and surgeons, Misonix has taken the same strategy with the bone scalpel. We view that as a definite two plus two equals five because that strategy, along with the relatively small market penetration we both have, will allow for acceleration of growth using our combined commercial channels. So, I like to call our business, Kyle, when we started out, a mile wide and an inch deep, and all we're doing is taking that inch deep, and we are going two or three inches by going deeper with our customers. It might seem like it's not tangential, but when you really look at it, hopefully, that makes sense the way I described it, we are going deeper with the same customers using our same commercial channels. We are very excited about that. We'll continue to take a measured and prudent approach and a careful approach to M&A. We've just been very fortunate that we found two really good ones here that can fuel long-term accretive growth for our shareholders.

Great. And then just the last question for me is it sounds like the CartiHeal data looks pretty good, at least from a top-line perspective. I understand all the timelines and just trying to understand from your side what would prevent you from moving forward with the deal, as is already structured? Thank you.

Thanks, Kyle. There's not much I can share at this time. As I mentioned, we're currently reviewing the data. We will carefully analyze the data and the market opportunity. We're excited about the technology and the product. However, we need to assess the situation comprehensively, and that's what we are in the process of doing. We will communicate our decision through a press release, and that's all we can disclose for now. We will keep everyone updated on the next steps.

Thank you.

Thanks, Kyle.

And, sir, we are currently showing no additional participants in the queue. That does conclude our conference call for today. Thank you all for participating. You may now disconnect.