Bioventus Inc. Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Bioventus Inc. Third Quarter of Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Dave Crawford, Vice President of Investor Relations. Thank you. Please go ahead.

Good morning, everyone and thank you for joining us. It is my pleasure to welcome you to the Bioventus 2021 third quarter earnings conference call. With me this morning are Ken Reali, CEO, and Greg Anglum, Senior Vice President and CFO. Ken will start with a review of the quarter and the current environment and then provide an update on our recent acquisitions. Greg will follow with more details on our third quarter results and an update on our planning outlook for 2021. We'll conclude the call with a Q&A session. A presentation for today's call is available on the Investors section of our website, bioventus.com. Before we begin, I want to remind everyone that our remarks today include forward-looking statements based on the current expectations of management and are subject to risks and uncertainties that could lead to actual results differing materially from those indicated. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission, including the risk factors outlined in our Form 10-K for the year ended December 31, 2020, and our most recent 10-Q filing. Please be cautious not to rely too heavily on any forward-looking statements, which only reflect the views as of the date they are made. Although the company may update these statements from time to time on a voluntary basis, there is no obligation to do so unless required by applicable securities laws. This call will also reference certain financial measures not calculated in accordance with generally accepted accounting principles, or GAAP, commonly referred to as non-GAAP financial measures. Definitions and reconciliations of these non-GAAP financial measures to the closest GAAP measures are available in the earnings press release on the Investors section of our website at www.bioventus.com. Now, I will turn the call over to Ken.

Thanks, Dave. Good morning, everyone and thank you for your interest in Bioventus. As we enter the final months of a transformational year, the outlook for Bioventus has never been more exciting due to the exceptional execution of our growth strategy by our entire team. I'm encouraged by our commercial team's continued performance and resiliency as they delivered another quarter of double-digit organic growth and continue to respond to the challenging dynamics brought on by the pandemic. As we work to integrate Bioness and Misonix, we remain steadfast on returning patients back to their active lifestyle. I will begin my remarks with a review of our results for the quarter before providing an update on our recent acquisitions. Revenue increased 27% for the quarter to $109 million despite some continued challenges from the pandemic, as we were able to more than offset these headwinds with strong execution across our growth initiatives in other areas of our diversified portfolio. We face some ongoing challenges from the pandemic, concentrated in the bone graft substitutes business as elective procedures were interrupted in specific regions of the country during the quarter. As we moved into October, we saw conditions begin to gradually improve and we currently expect to trend closer to a more normal environment by the end of the fourth quarter. Even with these challenges, we delivered an exceptional quarter of 14% organic growth. In order to give you a better sense of what the growth looked like against our pre-COVID levels, organic growth compared to the third quarter of 2019 across our three verticals in more detail. Across pain treatments, we saw double-digit growth, driven by continued share gains for our single injection DUROLANE therapy and our three-injection GELSYN therapy. We remain well-positioned to take advantage of the shift toward single and three-injection treatment for osteoarthritic knee pain. DUROLANE which was the last single injection product launched four years ago, now represents roughly 20% share of the single injection market. Our ability to increase our share is driven by multiple factors. First, our market access strategy of working with private payers is fueling growth as we further augment the strong reimbursement for the therapy. Second, DUROLANE has the highest molecular weight of single injection therapies available which produces the longest resonance time in the joint and an extended half-life. Notably, the American Academy of Orthopedic Surgeons recently released updated clinical practice guidelines stating certain knee osteoarthritis patients showed statistically significant improvement from high molecular weight treatments. Like DUROLANE, GELSYN represents an opportunity to further expand our share. GELSYN also experienced significant double-digit growth for the quarter and has demonstrated continued share gains. Third, our five-injection therapy, SUPARTZ, continues to maintain its leading share position of approximately 40%. While DUROLANE and GELSYN are below this share in their respective categories, there is significant room for additional growth in coming years for both products as they increase penetration in their respective markets. As the only company with a portfolio of HA products across single, three, and five-injection therapy, we have now consistently held the number two share position across the entire category and look to become the market leader in the coming years. Turning to our bone graft substitutes vertical, we saw mid-single-digit growth despite the interruption in elective procedures I mentioned earlier. Helping fuel our momentum has been the recent launch of OSTEOAMP Flowable, our injectable allograft bone graft substitute solution which can be used for a variety of procedures, including minimally invasive spinal fusions, the fastest-growing area in spine. We are excited by the initial market reaction and feedback from surgeons and we continue to see bone graft substitutes as a double-digit growth opportunity. Finally, we saw double-digit growth across our restorative therapies vertical, bolstered by our advanced rehabilitation products acquired as part of the Bioness acquisition. Additionally, we initiated a pilot to utilize our call point access and sales force to further accelerate Bioness double-digit growth. The pilot focused on our L300 Go product for patients with gait disturbance, leverages our sales force's relationships with orthopedic surgeons to prescribe the L300 for individuals who receive a total knee replacement but experience thigh muscle weakness during their rehabilitation. Additionally, our legacy Exogen business grew mid-single digits organically during the quarter. This performance benefited from growth in our international region which faced an easier comparison in the third quarter, given the impacts of the pandemic in the prior year. Across our international segment, growth of 39% was enhanced by our Bioness acquisition, while organic growth for the quarter was 11%. With close to 10% of our sales coming from international regions, our mix of international sales is below peers. As we introduce new products across various regions and execute against our go-to-market strategy, we expect to see international expansion as a catalyst for future growth in the near and midterm. Now, let me update you on our recent acquisitions. In the third quarter, Bioness contributed $11 million of revenue and continues to track ahead of our expectations. Revenue was strong across both advanced rehabilitation products and peripheral nerve stimulation, or PNS. The integration of Bioness continues to progress as planned with several key milestones having been completed. We are realizing planned synergies and reached breakeven profitability at the end of the third quarter. As we look ahead to next year, we have identified specific synergy targets and see Bioness contributing positive EBITDA. Our timeline for full completion of the integration remains the first quarter of 2022. In addition to the financial benefits, Bioness is providing us valuable experience as we prepare to begin the integration of Misonix and look to further develop integration as a core competency of Bioventus. In addition to the L300 Go opportunity I mentioned earlier, we also began a pilot for PNS, utilizing our existing sales force. We are encouraged by the initial results and while a small piece of our portfolio today, we see PNS as a meaningful mid-term growth driver for our overall business. Turning to the recently announced closing of our Misonix acquisition, we are excited to welcome the Misonix team to Bioventus and for Stavros Vizirgianakis and Pat Beyer to join our board of directors. I am also pleased to welcome Sharon Klugewicz, who has served as COO of Misonix and will report to me as part of our executive team in the role of senior vice president of quality and regulatory affairs. The completed transaction creates a high-growth medical device company with a $15 billion total addressable market and the ability to gain significant market share, utilizing our nearly 500-person sales force across our three verticals. The combined business allows us to go deeper with our customers across surgical applications in spinal fusion, neurosurgery and wound treatments. The deal also furthers our strategy of accelerated revenue growth through acquisitions that leverage our existing infrastructure. We are confident Misonix will drive substantial shareholder value, as it is expected to be accretive to our organic growth profile while generating $20 million of cost synergies by the end of 2023. While we were waiting to clear the regulatory hurdles for the acquisition to close, we assembled an internal integration team and coordinated with the leadership at Misonix to develop our integration plan and timeline. We will kick off the integration of Misonix in the first quarter. While both Misonix and Bioness provide us with immediate catalysts for growth, our business development activity is also focused on ensuring Bioventus is positioned to maintain double-digit organic growth in the midterm. Last quarter, I spoke to you about the opportunity we were evaluating on whether to preserve our right to exercise our option to purchase CartiHeal. As we announced in late August, after extensive evaluation, we placed $50 million into escrow as a deposit. We plan to finance the remaining portion of the potential acquisition of CartiHeal with additional debt. While there are still steps to take for CartiHeal to gain FDA approval for their Agili-C implant, our due diligence strengthened our belief in the $1.3 billion addressable market opportunity and that it will be a high-quality addition to our portfolio. In coming to our decision, we discussed the merits of Agili-C with over 600 healthcare professionals. In addition, we engaged over a dozen private payers to understand the reimbursement landscape for this unique therapy. Throughout these discussions, there was consistent feedback that Agili-C fills a significant unmet need for surgeons in the treatment of patients with cartilage defects and knee osteoarthritis. Likewise, directors of private payers expressed a willingness to support reimbursement for Agili-C based on the strength of the clinical data which demonstrates superiority to current surgical standard of care. While we are excited about the opportunity for Agili-C to receive FDA approval and to acquire CartiHeal in the second half of next year, we don't expect the acquisition to drive material growth until a few years after launch as private payers steadily begin reimbursing Agili-C. We will continue to provide updates on the status and timing of the potential acquisition as we gather new information on the approval. While the North American market remains a meaningful part of our long-term growth strategy and we continue to build new relationships, we are currently highly focused on successfully integrating Bioness and Misonix. In conclusion, we continue to build momentum across our business, execute on our growth strategy and drive further market penetration with our HA and bone graft substitutes products. I am confident we have enhanced our growth profile with the acquisitions of Bioness and Misonix and will leverage our commercial infrastructure to deliver consistent double-digit growth while ensuring we deliver on our cost synergies. Now, I'll turn the call over to Greg.

Thanks, Ken. And let me add how encouraged I am by our team's success in the quarter as we continued to execute in a challenging environment while showing meaningful progress against our growth initiatives throughout the year. Let's begin with a review of our third quarter results. Revenue of $109 million increased 27% compared to last year. We saw a 14 percentage point increase from organic revenue, along with a 13 percentage point benefit related to Bioness. Although hospital utilization was negatively impacted by a new wave of COVID-related hospitalizations during the third quarter, we were able to deliver strong sales as we benefited from our diversified portfolio and the execution of our commercial teams. Our sales performance drove adjusted EBITDA of $21 million and adjusted diluted earnings per share of $0.25. Across pain treatments, we grew 24%, broken down by 21 percentage points of organic growth across our HA portfolio and a 3 percentage point contribution from our PNS products that we recently acquired from Bioness. PNS revenue grew double digits compared to the prior year under Bioness ownership. As Ken mentioned, we continue to capture market share in our DUROLANE and GELSYN products. Compared to the same period two years ago, DUROLANE revenue has more than doubled in the U.S. and has nearly doubled globally. In bone graft substitutes, revenue was impacted by increased COVID-related hospitalizations that reduced the number of elective procedures. As a result, revenue grew 4% but is up 35% year to date compared to 2020 due in part to the favorable comparison versus prior year which saw significant impacts from COVID. We estimate the impact from the disruption during the third quarter of this year to be approximately $2 million. Excluding this headwind during the quarter, growth would have been double digits, consistent with prior quarters. Conditions have begun to gradually improve over the past month and we currently expect to trend closer to a more normal environment by the end of fourth quarter. Finally, across restorative therapies, we delivered 52% growth. Organic sales growth from our Exogen product was 6 percentage points, while inorganic growth from sales of the Bioness Advanced Rehabilitation portfolio was 46 percentage points. Growth in advanced rehabilitation compared to prior year increased double digits. Moving down the income statement, adjusted gross margin of 79% was unchanged compared to last year. While we've experienced some increased transportation costs due to global supply chain challenges, we have offset this through improved manufacturing performance, as well as a more favorable product mix. Overall, adjusted operating expenses increased $17 million, driven by costs related to Bioness, public company costs and the return to more normalized spending patterns when compared to the prior year. In addition, given the strong sales in the first half of the year, we are electing to make some additional strategic investments in the second half to further bolster our growth strategy and build out our corporate capabilities. Now, turning your attention to our bottom line financial metrics, adjusted EBITDA totaled $21 million, compared to $23 million in the prior year. Lower adjusted EBITDA was a result of higher operating costs I just mentioned, partially offset by higher sales volume. Adjusted operating income of $15 million was unchanged compared to last year. Adjusted net income totaled $14 million, compared to $13 million a year ago and we earned $0.25 of adjusted diluted earnings per share. Moving to the balance sheet and cash flow statement. Our balance sheet is solid and continues to provide us with strategic flexibility as we ended the quarter with $81 million of cash on hand and $177 million of debt outstanding. Our revolving credit facility remained undrawn at the end of the third quarter. When factoring in the close of Misonix which occurred subsequent to quarter end, debt now stands at $376 million and cash on hand is in excess of $50 million. Operating cash flow represented an inflow of $11 million for the quarter. As Ken highlighted, we exercised our option to purchase CartiHeal with a $50 million deposit and made an additional financial investment during the quarter in Trice Medical. We continue to generate strong and consistent cash flow which provides us with the capability to quickly delever when taking on higher debt levels for short periods of time. Finally, let me view our 2021 guidance which has been updated to reflect the performance of our business in the third quarter, our fourth quarter expectations and the closing of Misonix. We now expect 2021 revenue to be $425 million to $430 million, an increase from our previous guidance of $405 million to $415 million. The increase in revenue guidance contemplates two months of Misonix revenue following the October 29 closing. Our guidance for adjusted EBITDA is unchanged from previous guidance of $77.8 to $82.0 million. However, the guidance now reflects stronger than anticipated adjusted EBITDA generated from legacy Bioventus and the Bioness acquisition, offset by the inclusion of Misonix into our guidance. In closing, we continue to execute on our growth initiatives across our business. I'm confident in our ability to maintain our top line momentum while we complete the integration of Bioness in the coming months and begin to integrate Misonix.

Your first question comes from the line of Kyle Rose from Canaccord. Your line is open.

Great. Good morning, everybody and thank you for taking the questions. So congrats on a strong quarter here. Wanted to see if we could just touch first on the pain and joint preservation section here. I'm just wondering, obviously we saw some surges of the delta variant and I realize that that impacted your BGS business. But I'm wondering, over the course of the last 18 months and particularly in the Q3, have you seen a benefit there in your pain treatment, just as people might be pushing out total joint procedures, they might be getting more injections. Is that a dynamic that you're seeing here? Or is it really just solely reimbursement access?

Yes, Kyle. Good to hear from you. The pandemic has primarily created more fluctuations in the market. We’ve observed variations in the use of hyaluronic acid therapy alongside the ups and downs of elective procedures. As long as patients feel comfortable visiting their doctors, even during the delta variant, elective procedures have been more affected by COVID hospitalizations. Our product line in this area remains strong. From our viewpoint, this isn't primarily driven by reimbursement. While our reimbursement strategy supports our market access efforts, it mainly enhances our market penetration. Ultimately, it hinges on access to physicians, and we did not observe any limitations in that access during the third quarter.

Okay, that's very helpful. And then you talked about some I guess early initiatives to help drive the Bioness acquisition. I think you talked about some pilots for using the existing sales force for PNS. And I'm just kind of trying to understand maybe when we should expect to see some of those cross-selling synergies really start to play out into this model. I understand it's still early days but maybe just help frame what that cross-selling tailwind should look like in 2022.

Sure, starting with peripheral nerve stimulation, our primary focus is on post-surgical pain. We view products like the StimRouter, our current PNS device, as alternatives to opioids for managing post-surgical pain. The initial pilot has been successful for us, thanks to a dedicated PNS team that we acquired from Bioness, who works excellently with our team to generate leads. We anticipate expanding this effort to our wider sales team in 2022, leading to increased sales and revenue synergies as the year progresses. Regarding the L300 Go, we have initiated a pilot focused on gait disturbances following total knee procedures. This involves patients with weakened quadriceps muscles, which is quite common due to osteoarthritis during rehabilitation. The Bioness L300 Go helps restore gait through gyroscopes and stimulation of the muscle. We're excited about this initial pilot as it enables surgeons to prescribe it and helps patients return to normal walking more quickly. We expect this pilot to continue through the end of the year and into the first quarter, with significant revenue synergies anticipated, particularly in the latter half of 2022.

Okay, great. Thank you for the additional color here.

Thanks, Kyle.

Thank you. Your next question comes from the line of Robbie Marcus from J.P. Morgan. Your line is open.

Hey, guys. This is Alan on for Robbie. Just starting off with the kind of trends that you're seeing and sort of piggybacking off the question asked previously is that it seems like you guys are definitely holding in a little bit better than some of your other surgical and orthopedic exposed peers. And I would guess some of that's based on where you are kind of in the treatment paradigm. But can you just talk about why that might be the case, in your own view, why you're holding up a little bit better? In light of COVID-19 trends in third quarter, why you have so much more confidence in kind of this normalization over the course of 4Q when we're hearing some other peers talk about an extension maybe even into 2022?

Great question, Alan. It begins and ends with our team and our people. We have a resilient, dedicated group at Bioventus, which spans our entire business from the sales team to everyone who supports our sales efforts. This dedication, along with our strategy, results in what you see today. When we look at our joint pain treatments, particularly our HA products, these are typically the first line of defense. As long as patients feel comfortable visiting the doctor for treatment, we are in a good position with this therapy. We have strong reimbursement, and we're the only company offering single, three, and five-injection options. We've observed continued acceleration in the use of the single injection throughout the pandemic. We believe with our DUROLANE product, the highest molecular weight HA product currently available, we will keep gaining market share. The product is truly exceptional. For GELSYN, our three-injection option, which still captures a relatively small share of the three-injection market, we anticipate further market share growth as well. Our product range is extensive and diverse, reaching a broad spectrum of orthopedics. We engage with thousands of orthopedic surgeons monthly, which contributes to the balance and growth consistently seen at Bioventus. In advanced rehabilitation, we've seen remarkable results from the Bioness team, particularly with their gait restoration device, the L300 Go, aimed at post-stroke patients, which has been a tremendous success this year. We continue to see positive results from Exogen. Despite challenges with bone graft substitutes, we achieved 4% growth, even in regions heavily impacted by curtailed elective procedures. This success underscores our strategy of being flexible with spinal hardware, collaborating with every spine surgeon regardless of the implant used, and providing a superior product with a committed sales team. Ultimately, as I mentioned at the start, it all comes down to our people and our culture, along with our ability to execute an effective strategy in the diversified environment we operate in.

Got it. And then, I guess just as a quick follow-up. When I look at kind of the Misonix portfolio, it does look like, correct me if I'm wrong, maybe a bit more interventional in nature. So how has that portfolio really held up? I would say that your updated guidance is roughly in line with what we were contemplating for Misonix. But just in terms of the recovery trends for that business and whether or not that's influencing your decision to cite the integration, it was kind of a quarter late after close. Thank you very much.

Yes, Alan. It's continued to hold up. I would say like a lot of elective procedure-based technologies, it's had some headwinds in certain parts of the country like we saw with our bone graft substitutes. But that's balanced by their wound business which is less related to elective procedures. So they're a balanced portfolio as well, having a foot in both elective surgical procedures in spine largely and then in wound treatments as well. So that team has continued to execute and grow that business, so we're pretty excited about that. And once again, see tremendous synergies there with our combination in bone graft substitutes, both technologies, the BoneScalpel, as well as our bone graft substitutes being agnostic to spinal hardware. We see the ability to execute with a combined sales team and penetrate the market more quickly than we are that both companies are doing solo today. And then with the wound products, we'll continue to sell to the wound centers and the hospitals but add in our office call point there as we go forward with the wound products where a lot of wounds with the pandemic are being treated in the office which offers a great opportunity for expansion of their wound business.

And our next question comes from the line of Robbie Marcus with J.P. Morgan. And our next question comes from the line of Drew Ranieri with Morgan Stanley.

Hi, thanks for taking the questions. I'm sorry if I missed this, but with Bioness now acquired and Misonix closed, how are you planning for the long-term regarding the gross margin and the growth profile of Bioventus, as well as the margin profile moving forward?

Yes. Look, when we look at opportunities like this, Drew and thanks for the question, number one, it has to drive accretive growth. And our goals are consistent double-digit growth in our business. And certainly, we look at both Bioness and Misonix as technologies that have a lot of that growth profile left in them to drive that consistent double-digit growth that is accretive to Bioventus. As far as the margin profile, largely those are in line with what we've done historically. We certainly look at that very carefully when we do any M&A and understand what the margins are, what increased volume can do to impact margins and certainly what reimbursement looks like as well and what that can look like in our hands margin-wise as we move forward. So both of those areas, accretive growth and margin, are critical components. And certainly Bioness and Misonix check both those boxes for us.

Got it. Regarding international, I understand that it represents only about 10% of total sales, but growth remains strong. Can you elaborate on some of your initiatives since you've expanded your portfolio? Please provide more details about your go-to-market strategy. Also, could you outline a framework for where international sales might stand as a percentage of total sales in the next 12 to 24 months?

Today, international sales account for about 10% of our revenue, which is lower than the average for our peers. However, we believe that with our expanded portfolio including Bioness and Misonix, we can enhance our growth. We have direct sales teams in Canada, the U.K., and Germany, as well as a strong international office in Amsterdam. We are optimistic that these resources will help us accelerate our international growth beyond our current double-digit rates. We foresee this trend continuing not just over the next year and a half but also in the next few years, and we anticipate international sales will increase above the current 10%. We recognize significant potential here, especially since Bioness and Misonix primarily relied on distributors, whereas we have our own direct sales teams. This infrastructure will enable us to penetrate markets more effectively than either Bioness or Misonix could. As a result, we expect our international growth to outpace overall company growth, which excites us. Additionally, we view the APAC region as another promising opportunity and will explore it more thoroughly as it develops.

And then just one last question, just on DUROLANE for a moment. You called out it's the highest molecular weight and I think coming out of AAOS, there was maybe some positive podium presentations or discussion about high molecular weight HA. But what's been the feedback from clinicians after hearing that data? Are you seeing that in the field? Thank you.

Yes, Drew. It's a net positive. The AAOS comments on HA coming out of the meeting in September were an improvement, we feel and I think others would agree, over the somewhat tepid attitude toward HA back when they last reviewed this in 2013. Now despite that, the HA business overall has continued to grow at 3% to 5%. But the fact that DUROLANE is the highest molecular weight and they certainly correlated strong clinical results with high molecular weight HA, of course DUROLANE was not called out. But we know based on our data that it is the highest molecular weight and this is peer-reviewed data. We feel very good about that position. We feel very good about DUROLANE's ability to continue to penetrate the single injection HA market. Keeping in mind, it's only been on the market for four years today, it's about 20% of the single injection market and we think we can double that share over the coming years. If we use SUPARTZ as kind of a predicate for that which has 40% of the five-injection market, we think we can get there with DUROLANE in the years to come. And we're very excited about that and certainly the impact it has on patients and their osteoarthritis pain which continues to be a growing demographic trend.

Thank you. And I'm showing no further questions. So with that, I'll turn the call back over to CEO, Ken Reali, for any closing remarks.

Thank you. Thank you all for your continued interest in Bioventus. While we continue to execute well in this uncertain environment, we remain committed to creating shareholder value. I am confident in our growth strategy and in the ability of our diversified market-leading portfolio to sustain double-digit organic growth while successfully integrating our recent acquisitions. Have a great day.

This concludes today's conference call. Thank you for participating. And you may now disconnect.