BVS - NASDAQ

Good afternoon, and welcome to the Bioventus Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Dave Crawford, Vice President, Investor Relations. Please go ahead.

Thanks, Chad. Good afternoon, everyone, and thanks for joining us. It is my pleasure to welcome you to the Bioventus 2023 first quarter earnings conference call. With me today are Tony Bihl, CEO; and Mark Singleton, Senior Vice President and CFO. Tony will begin his remarks with his perspective on our business, lay out our current priorities, and then will review the quarter. Mark will offer further detail on our first quarter results, and we will finish the call with Q&A. The presentation for today's call is available on the Investors section of our website, bioventus.com. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including item 1A, Risk Factors, of the company's Form 10-K for the year ended December 31, 2022, as well as our most recent 10-Q and other company's filings made 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 it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by securities applicable. 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 as non-GAAP or adjusted financial measures. Important disclosures about and definitions and reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website at bioventus.com. Now, I'll turn the call over to Tony.

Well, thanks, Dave, and good afternoon, everyone. Thank you for your continued interest in Bioventus. Let me begin by saying that I'm thrilled to be back leading Bioventus and its talented team. Before discussing the quarter's performance, I want to take a few minutes to discuss my perspective on our business since returning and to lay out our priorities for the remainder of the year. Over the past month, I've had the opportunity to reconnect with employees from across the company, meet new members of the Bioventus team who joined since my retirement in 2020, and to understand their perspective on our business. Despite the near-term challenges, I am confident in the revenue and earnings growth opportunities and our ability to reduce leverage as we move forward. Across our business, we participate in large growing markets and provide innovative differentiated products for our patients. Most importantly, we have a dedicated team of employees who truly understand our current challenges and are focused on execution, delivering on our commitments, and enhancing our business. My role is to stabilize the team, to build on the positive elements of our profitable growth plan and then quickly focus on action plans to address issues that are impacting our profitability and predictability. In returning as CEO, my leadership team and I are prioritizing the here and now and look to aggressively address the issues impacting our recent performance. Our attention will be on ensuring we deliver not just growth but profitable growth, and we have a laser-like focus on remaining compliant with covenants of our amended bank loan and driving down leverage. While we will not reverse all the headwinds of the past year in a single quarter, we believe we will over the course of the next several quarters rebuild our balance sheet and look to regain credibility with our investors. Over the remainder of 2023, we'll prioritize the following strategic areas: first, dissecting the impact of the recent headwinds in our HA franchise and executing the necessary actions to improve our business and predictability; second, continuing to evaluate the divestiture of noncore assets after closing the divestiture of our wound franchise; and third, examining opportunities to increase profitability, improve operating efficiency, and controls throughout our business. Let me provide further context on these three areas before reviewing our recent quarter. First, due to the recent increase in procedural volume through private payer contracts in our HA franchise, we've initiated a strategic review to assess potential changes to bolster profitability. It's important to highlight that most of the increased volume has resulted from one private payer, and we continue to partner with them to understand the changes impacting us in recent quarters and to improve the quality of their invoicing. In addition, we would expect to see smaller impact on the future results given the renegotiated rebate rates that began in the third quarter and lower pricing on which the rebates are based. These aspects will reduce uncertainty, but we must evaluate additional steps that we can further improve our HA franchise. Working with an external consultant, we expect to conduct our evaluation over the next few months and provide an update on our second quarter earnings call as we assess the impact of increased sales volume coming through private payer contracts. Second, we are encouraged by last week's announcement regarding the strategic divestiture of our wound business, which simplifies our business and allows management to focus additional attention on the remaining areas of our portfolio. The divestiture of our wound franchise also improves our liquidity and delevers our balance sheet. At closing, we expect to receive, after fees, approximately $30 million, which we plan to use to repay debt. This debt repayment will remove the need to repay quarterly - or to pay quarterly amortization on our term loan for the next three quarters and potentially additional quarters with the proceeds from the potential sales milestones. While the wound divestiture is a positive step, we will continue to evaluate opportunities to further strengthen our balance sheet through additional divestiture of noncore assets. Our prioritization and investment emphasis will be placed on the areas of the business where we can strategically win. Still, we will remain disciplined in any negotiation for areas that we define as noncore and will only consider divesting assets which simplify our business and we believe at an attractive value. The third focus area involves exploring opportunities to increase profitability and improve operating efficiency and controls throughout our business. At the start of the year, we began work across select areas of our business where inefficiencies arose due to our recent acquisitions and employee turnover. We're beginning to make some steady progress in addressing these operational inefficiencies, but additional work will be required throughout the year. Those efforts should drive improved working capital performance and enable us to find potential cost savings and enhance our back-office processes and internal controls. In addition, we continue to expect to complete the integration of Misonix by the end of the year with the move of the manufacturing to our new facility in Memphis. Now let me turn to our first quarter results. For the quarter, revenues of $119 million increased 2% compared to the same period a year ago, which was in line with the commentary Mark laid out on our last quarterly earnings call. More importantly, our adjusted EBITDA increased to $17 million compared to $7 million in the prior year. Adjusted EBITDA was above our expectations due to disciplined control of our expenses. Across pain treatments, we continue to be impacted by the rise in volume related to private payer contracts for hyaluronic acid. The impact of this shift required us to increase accrual rate for HA sales, but strong volume growth helped to mitigate the headwinds. Once again, Durolane was less impacted given its clinical differentiation. Consistent with our message last quarter, we anticipate price erosion to subside as we progress through 2023. Meanwhile, across our HA portfolio, we believe market growth, combined with an increase in share from lower selling price, will drive volume growth. However, we expect overall reduction in HA revenue of high-single to low-double digits due to the impact of lower selling price. We do expect by the fourth quarter of this year and the first quarter of next year to begin to see turnaround and improved HA revenue growth driven by price stabilization and volume growth. Now turning to Surgical Solutions. For the quarter, we continued to deliver strong double-digit organic growth. Growth across bone graft substitutes was once again driven by OsteoAmp Flowable. Additionally, our ultrasonics portfolio grew high-single digits. Looking ahead to the second quarter, we expect some slowdown in our bone graft substitute portfolio due to increased customer churn, but recent large account wins are anticipated to offset these losses as we move into the second half of the year. While overall growth will likely be lower in the current quarter, we forecast that our double-digit organic growth will continue for the full year. Our overall smaller market share and our market growth rates provide a strong backdrop for continued market penetration and growth across both ultrasonics and bone graft substitutes. Within Restorative Therapies, organic revenue grew double digits, driven by Advanced Rehabilitation. Revenue growth partially benefit from the recovery associated with supply chain disruptions and regulatory approval challenges experienced in the fourth quarter. Exogen revenue was similar to prior year and reflects the improving trend we're experiencing across the business as we continue to reengage physicians after our sales force realignment at the start of 2022. When excluding our recently divested wound portfolio, growth across Exogen and Advanced Rehabilitation was approximately 300 basis points higher than the total Restorative Therapies vertical. We expect growth in Advanced Rehabilitation combined with stability for Exogen will drive overall mid-single-digit growth for our entire Restorative Therapies portfolio. Finally, our International segment grew 14%. Constant currency growth was 18%. Growth was driven by our recovery in Advanced Rehabilitation from the EU MDR related regulatory headwinds as well as strong growth in Durolane and bone graft substitutes. We anticipate maintaining double-digit growth in our International segment as we proceed through the year. Finally, let me repeat how excited I am to be leading Bioventus again. I'm confident in our team's ability to address our immediate challenges and move the business forward. We are aggressively prioritizing those areas most meaningful in driving increased profitability and margins, improving our balance sheet, and enhancing our operational efficiencies as we work to restore your confidence in Bioventus. Now let me turn the call over to Mark.

Thanks, Tony, and good afternoon, everyone. Let me start by saying that I am pleased with our ability to reduce cost this quarter as we center our attention on improving our operating margins and driving profitable growth. Revenue for the first quarter was $119 million, which was 2% higher compared to the prior year. On a constant currency basis, sales were up 2% compared to the prior year. Higher revenue and lower operating expenses related to our restructuring, combined with spending discipline, increased our profitability as we generated adjusted EBITDA of $17 million. Across pain treatments, sales declined 11% compared to the prior year as we face continued pricing pressure due to the move from WAC to ASP in our HA portfolio, along with the increased percentage of volume related to private payer contracts. Revenue for our largest HA therapy, Durolane, was similar to last year as volume growth offset reductions in selling price. Meanwhile, we experienced continued pricing pressure across GELSYN, but for the first time since the second quarter of last year, we saw an increase in volume. Also helping to offset pricing headwinds was volume growth in two parts. In Surgical Solutions, we grew 12%, representing four consecutive quarters of double-digit growth as we maintain momentum across both our bone graft substitutes and ultrasonics portfolios. We continue to expect double-digit growth for the full year. But as Tony stated earlier, results for the second quarter are expected to be below recent performance. Finally, Restorative Therapies delivered 11% growth, driven by double-digit growth in our Advanced Rehabilitation portfolio. Additionally, Exogen sales grew domestically mid-single digits as we continue to regain momentum. Overall, we expect mid-single-digit growth across our Restorative Therapies vertical. Moving down the income statement. Adjusted gross margin of 74% was down 190 basis points compared to the prior year and was driven by two primary factors. First, we were impacted by the increased percentage of HA revenue going through private payers and the decline in our overall ASP. Second, we had unfavorable product mix given higher revenue from our Advanced Rehabilitation portfolio. Overall, adjusted total operating expenses were $12 million lower compared to the prior year. The reduction in expense resulted from benefits of our restructuring, combined with spending discipline across general and administrative expenses and reduced investment in research and development. Now turning to our bottom line financial metrics. Adjusted EBITDA totaled $17 million compared to $7 million in the prior year. Increased revenue and lower operating expenses more than offset a decline in gross margin. Adjusted operating income increased to $14 million from $2 million in the prior year. Adjusted net loss totaled $16 million compared to the income of $3 million a year ago. The loss for the quarter was driven by the establishment of a noncash valuation allowance against our deferred tax asset, resulting from the impairment of intangible assets associated with the wound divestiture. The impact of the valuation allowance lowered income by $31 million. Adjusted loss per share was negative $0.26 for the quarter. The valuation allowance unfavorably impacted earnings by $0.49 for the quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with $47 million of cash on hand and $446 million of debt outstanding. We had $29 million drawn on our revolver credit facility at the end of the first quarter, which boosted our cash on hand at the end of the quarter. In the first week of April, we repaid an additional $15 million of our revolver draw. The resulting draw on our revolver of $14 million is related primarily to our $10 million payment to exit the CartiHeal acquisition. Operating cash flow represented an inflow of $2 million for the quarter as we saw an improvement in working capital. As we mentioned last quarter, we improved our liquidity position by eliminating the entire $350 million of deferred purchase obligations and sales milestones related to CartiHeal. In addition, we worked with our banking partners to amend our debt agreement to provide additional headroom with our covenants. Our adjusted EBITDA for the quarter was ahead of our expectations, and thus, we remain well within compliance with our leverage and interest coverage covenants at the end of the first quarter. Finally, due to the timing of last week's wound divestiture, Tony recently being named Interim CEO, and wanting to receive additional confirmatory invoices related to our HA business, we are again delaying our 2023 sales and earnings guidance until the impact of these can be firmly quantified. With that being said, we expect to achieve at least $68 million in EBITDA for the year and to remain compliant with our debt covenants throughout the year. In closing, we remain focused on enhancing our liquidity and continuing to improve our financial performance through increased revenue, higher operating margin, and disciplined expense management. Operator, please open the line for questions.

[Operator Instructions] And the first question will be from Alex Nowak from Craig-Hallum Capital Group. Please go ahead.

Okay, great. Good afternoon, everyone. Tony thanks for joining us here. Tony, when you look back at what happened from your retirement to now, can you just recap here from more of the Board perspective, what went wrong? And once these fixes are implemented, how do we prevent these challenges from happening again with the Bioventus story?

Alex, thanks for your question. as I said I'm excited and delighted to have joined the company after my 6-year term here at Bioventus and then about a 3-year retirement. Let me take it from this perspective. I think of when I look at where we are and I think of business as people, products, and processes, and let's talk about the here and now and where we go forward. And I'll touch a little bit on how we got here. But, first of all, since I've arrived here, I've been able to assess that people are really in a good place, very forward facing, very committed to building on what's working, very focused on correcting what's not working. This is a team that's not down from some tough periods of time, but again very forward focused. So I was very pleasantly - I won't say surprised, but pleased with what I see in the people and the team. And then I look at the products. 70% of the revenue of the company were products that were here when I was the CEO and there are many new things. The great news about the products is these are truly differentiated products; in many cases leadership positions, top one or two positions in their markets. And in this marketplace that gives you a fantastic foundation to build on. So you got people who know what they're doing and are in the right place and you got some terrific products. The thing that got us was process. I think that all that we did in the acquisitions and maybe the IPO collectively overwhelmed the processes of the company. And so that's the category that we've got to focus most of our time and energy. But having the first two in place gives me great confidence that we've got something to build on here. And you've heard the conversation about processes up to now. I think you've seen some of the surprises and you've seen some of the things that are working behind the scenes. I think that there are many projects underway right now to focus on improving process and I think as we do those things that we'll get ourselves out of this. The learning is taking on too much at once without really understanding maybe all the aspects of the impact of those things just overwhelm the organization, but it's fixable.

No, I appreciate that. Maybe digging a little bit deeper into the business. I think what I'm trying to figure out, on the HA side of it, are the headwinds getting worse? It looks like the growth decline wasn't as bad as some prior quarters, but it does now sound like that the stabilization gets pushed out to really Q1 2024, if I heard you correctly.

Well, I think what we're describing is we're going to start to see positive movement in the fourth quarter of this year. And that's becoming clear. Look at the HA story and some very, very difficult times are behind us. That said, there are still dark clouds that we're working our way through. But I think the hard part of the storm is over. These dark clouds are the things that we still need to work through. And I think Mark outlined it. I think we've got a better handle on what exactly that's going to look like in terms of the impact of pricing. Underlying volume growth has still been positive, and we feel good about that. But I think we know what the end of this looks like. And I think underlying the HA business is a good business.

And then on the bone graft substitute side, customer churn there. That business has been really strong throughout all these different challenges in the other segments. But are we starting to see maybe some cracks start to form there? Maybe expand on that customer churn that you mentioned in Q2.

No, I think the key element there was there is a certain turnover of distributors that occur naturally in this business. We probably got a little bit behind in bringing new distributors on. Good news is we're feeling that turning very positive now. And so we're bringing - as you lose some distributors, you bring new distributors on to keep that business moving forward. We had a little bit of a gap, and we're filling that gap now. So I think that what you heard in the comments is really where we stand and that is, we'll come through with maybe a little bit of a softness in Q2. That's still the fallout of that slowness in getting new distributors on, but now we've got a handle on that, and we'll go forward. Not a fundamental problem with the business.

Okay, got it. Appreciate the update. Thank you.

[Operator Instructions] The next question is from Robbie Marcus from JPMorgan. Please go ahead.

Hi, thanks. This is actually [Alan] on for Robbie. You touched upon how the wound divestiture seems like a step in the right direction, but you really talked about potentially further rationalizing the portfolio. So when I think about the kinds of assets that you might be looking to either sell or spin, what kind of metrics are you really looking at? What would really make a business one that really belongs at Bioventus and one that could maybe do better somewhere else?

Allen, let me take it first. Tony here. I think as we've been scrubbing through this, and this is a process that began before I arrived. I think a lot of good work was done to really take a hard look at where we are. For me, we're going to be driven by where can we properly invest to achieve long-term sustainable growth and potential market leadership. And that's the criteria that we're overlaying on this, ability to achieve long-term sustainable growth and can we make appropriate investment in all of these businesses, both commercial and development investment, to fund them going forward. If we can't get there, we can't see a clear path to that, then these need to be candidates for us to look for some better ownership in those businesses. And so I think we're doing that evaluation now. And I don't think as we go through it, in the end of it, there'll be any dramatic surprises. But look, we're in these businesses, we would love to invest in them and grow them, but you just can't do all of that in all these places. So I think that will be the criteria we'll apply.

Got it. And then when I think about your P&L performance this quarter, obviously, messy with the divestiture and some of the GAAP, non-GAAP adjustments there. But when I look at actual your cost of goods sold, your SG&A, it looks like OpEx actually came in, I would say, a little bit better than expected. So when we look forward, how do we think about your efforts to really accelerate the top line once you get through the near-term headwinds while continuing to rationalize costs? Thank you very much.

Yes, thanks. This is Mark. I'm really pleased with our first quarter performance overall. We've done a great job, in my opinion, of managing our expenses, increasing our discipline coming out of the restructuring actions that we had. And so obviously, in the restructuring, there were some elimination of positions, but we also looked at a lot of other items of spending in our P&L to understand that and go deeper and make sure budgets were clear to everybody from a bottoms-up perspective and that everybody was held accountable and clear on what they needed to do to execute their part of that. And if you look at revenue in 1Q and spending in 1Q, both of those will be low points for the year. We expect revenue to increase in the remaining quarters above what we achieved in 1Q. And then spending will come up correlating with that revenue for things like commissions, employee merit, there's some phasing within our spending throughout the year from R&D and maybe that we didn't spend in 1Q that comes in Q2 and Q3 and Q4. But overall, it's just maintaining the discipline that we've established coming into the year and managing that and also making sure that we have the right investments while we have that spending discipline to drive the revenue - profitable revenue growth throughout the rest of the year.

Thank you. And the next question will be from Kyle Rose from Canaccord. Please go ahead.

Great. Thank you for taking the question. A lot has been asked, but Tony, I just wanted to ask from a cultural standpoint, look, it's been a challenging period for the organization. Can you just speak to the stability of the commercial team and the stability of, I guess, we'll call it the key leadership and the key contributors that you need to turn around the organization moving forward? Any turnover, things of that sort, that we should be aware of? Or how do we get comfortable with this period of transition for the org? Thank you.

No, thanks Kyle, I led off my comments about the confidence I have and the people we have on the team, and I've been able to spend some fair amount of time, certainly, on my direct reports and the leadership of the various aspects of our business, and I feel highly confident in that group. And I feel highly confident in the stability of that group. We've got the talent we need to lead forward. We've got a position to fill in our International General Manager's position, and we got a nice candidate list. So we are a good employer. We're a good place to come. We've got a neat International business to build on, and so we'll be able to find a candidate for that. I think we have had our share of turnover - more than our share of turnover in our sales teams. And part of what we're trying to do is restore confidence. And I think that that's very manageable to do. My style is to decentralize the leadership and the empowerment in the organization and get people to be part of the fix. And so I think our leaders are invigorated by that. They're energized by playing a role with helping this company get strong again, and we got a great foundation to build on. So I think they know what they have in terms of products. There's nobody leaving because our products aren't good. They want confidence in the company. And I'm here to work very hard with this team to restore that this can be done, that we will do it, and that the confidence can be established. So I think there's - again, I've been very focused on this team of, look, I'm going to spend my time looking forward and not looking backwards because that's where we have to focus our attention, driving this growth, letting people be empowered, be a part of the fix and part of the future. And I think the more you let people engage in that, the more they want to be part of this. So I feel like nobody can predict everything here, but I feel like we're going to stabilize much of the turnover that we have been experiencing. Certainly, the leadership team is stable and intact now with one open spot to fill. And I feel good about where we are.

Thank you for taking the questions.

You bet.

Thank you. And the next question will come from Drew Ranieri from Morgan Stanley. Please go ahead.

Hi, thanks for taking the questions. I know you don't want to give guidance right now, but just when we think about the 2023 EBITDA of at least $68 million, that's essentially taking the first quarter and multiplying that by 4. But as we do think about potential upside to that number for the year, would it come more from revenue upside? Or are you more focused on really OpEx improvements or even gross margins coming in a little better than expected? Just trying to get a sense of some of the moving pieces that are going to drive EBITDA there.

Yes. Drew, I really would say all of the above, we're focused, as Tony talked in his remarks, about recovering in the HA business in the second half and optimizing pricing and really going deep there, getting more focus on making sure that we're maximizing our opportunity in that market as we're seeing the positive volume growth that we talked about. The other - Surgical Solutions where we talked about from a full year perspective, expect that to have double-digit growth. When we look at our Advanced Rehabilitation portfolio, we expect double-digit growth from that. Our International business had a really good first quarter. We expect that to continue for the year. And so that's from a revenue growth perspective. But back to what I talked earlier about from a spending perspective. I do feel really good about the foundation that we've set in the organization coming into 2023 from a spending perspective and driving a lot more discipline in the organization that we've had in the past, making sure people are clear on their part of getting there and managing it from there. So spending will increase from 1Q, mostly due to revenue-related items, but there's also some phasing of R&D investments and things like this that raise along with employee salary. And so it's really just about essentially raising that revenue from what we saw in 1Q and then managing the spending accordingly as we go through the rest of the year and making sure that we're maximizing EBITDA, continuing to look for areas where we can get more efficient and, obviously, managing cash flow as well from the standpoint of continuing to focus on improving our leverage and working on working capital. From an accounts receivable perspective, we have a new operations leader coming in, he's all over our inventory to manage that down. So I know those aren't P&L items, but that's obviously important from a leverage perspective. And when we're really trying to manage this across the board to get back to the strong company that we know we are.

Thanks Mark. I appreciate that. And maybe going back - and this might be a question for both you and Tony. But going back to Allen's question about potential divestitures, and should we be thinking about those in the magnitude of the wound care business? Or just any more color around that? And then a third follow-up. I believe you mentioned that you are still seeing volume growth across the HA business. And right now, HA, the market is in disruption. So could you talk a little bit more about the volume growth and maybe any types of share shifts you are seeing within your products? Thanks for taking the questions.

Yes. I think - I'll just go back to. I think Tony summarized the divestiture situation perfectly. I couldn't have said that any better myself. I just think that it's not one or the other. It's really looking ourselves in the mirror and understanding what we're capable of to manage and maximize those products the best and what ones are going to require investments that we can afford and then just continuing to do that to make sure that we're making those best choices, and we're doing a lot of work on that as a team. So just continue to evaluate the portfolio there. There's not any one profile, as you said, that we would do. For the second - could you repeat the second part of your question?

Sure. Just with the disruption in the HA market broadly, you were talking about volume increases across your portfolio. But maybe just talk about what you're seeing in the market, any market share gains you're seeing across the injection types? Thanks.

Yes. We're continuing to see good growth in Durolane especially from a year-to-year unit perspective and SUPART

Thanks for taking the questions.

I'll just echo, underlying HA market is still - in the U.S. is still a good market. You're still talking about a 5% growth market as best everybody can predict. And with our growth rates, we're running a bit ahead of that in this quarter. So we have good confidence in where we are.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Tony Bihl for any closing remarks.

Well, again, thanks, everyone, for your continued interest in Bioventus. While some recent challenges remain in our business, we're confident that our results and execution this quarter was a first step in rebuilding our credibility and realizing our revenue and earnings growth opportunities. My leadership team and I lead a dedicated team of employees and are focused on our mission and stakeholder value creation. Thanks, again.