Good day. And welcome to the Bioventus Incorporated Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Dave Crawford. Please go ahead..

Thanks, Betsy, and good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Bioventus 2022 fourth quarter earnings conference call. With me this morning are Ken Reali, CEO; and Mark Singleton, Senior Vice President and CFO.

Ken will begin his remarks with an update on our settlement agreement related to CartiHeal and the progress of our work streams to enhance our financial position. Next, he will review the quarter and provide commentary on the recent headwinds to our HA franchise. Mark will then offer further detail on our fourth quarter results.

We will finish the call with Q&A. A presentation for today's call is available on the Investors section of our website, bioventus.com.

Before we begin, I would 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 SEC commission -- the SEC including Item 1A Risk Factors and the company's Form 10-K for the year ended December 31, 2021, as well as our most recent 10-Q and our upcoming Form 10-K and other company filings made with the SEC.

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 applicable securities laws.

This call will also include references to certain financial measures that are not calculated in accordance with U.S. Generally Accepted Accounting Principles or GAAP. We generally refer to these 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. And now, I'll turn the call over to Ken..

one, delivering on our annual operating plan where we achieve our sales plan, drive EBITDA growth and improve operating margins; two, completing our integration of Misonix and exploring additional financial savings across our business; and three, reducing working capital through decreased inventory and improved accounts receivable to drive cash flow.

Despite recent challenges, Bioventus still retains a strong diversified business with market tailwinds. We have multiple growth drivers obtained through our recent acquisitions, such as our ultrasonic surgical solutions portfolio, peripheral nerve stimulation and Advanced Rehabilitation.

Each of these should be coming to fruition over the next few years and enable us to accelerate growth by leveraging our leading medical devices, scale and commercial infrastructure.

And we remain confident in our ability to deliver cost synergies from our acquisitions and improve our overall expense profile across the business to further bolster our margin profile.

Finally, over the course of the next several quarters, we look to regain your confidence in our ability to execute as our results improve, and we deliver on our commitments. Now I'll turn the call over to Mark..

Thank you, Ken, and good morning, everyone. Let me begin with a review of our fourth quarter results. Revenue of $126 million, was a 4% lower, compared to the prior year. On a constant currency basis, sales were down 3%, compared to the prior year.

We saw a 10 percentage point decline in organic revenue, along with a 6-percentage point increase related to our acquisition of Misonix. Lower gross margin impacted our earnings as we generated adjusted EBITDA of $15 million and adjusted diluted earnings per share loss of $0.06.

Across Pain Treatments, sales declined 23%, compared to the prior year as we faced unanticipated rebate claims and pricing pressure related to our HA franchise and a decline in volume for Gelsyn, as Ken described earlier. In Surgical Solutions, we grew 27%.

We saw 14 percentage points of organic growth, representing three consecutive quarters of double-digit growth as we maintain momentum across both our Bone Graft Substitutes and Ultrasonics portfolios. The fourth quarter included a 13 percentage point contribution for one month related to Misonix ultrasonics portfolio.

Finally, Restorative Therapies delivered 4% growth. Organic growth declined 6 percentage points as anticipated supply chain headwinds, along with the delayed receipt of EU MDR certification and Advanced Rehabilitation impacted revenue. Inorganic growth related to our wound portfolio acquired a year ago, totaled 10 percentage points.

Moving down the income statement, adjusted gross margin of 71%, was 510 basis points compared to the prior year and was driven by two primary factors. First, we were impacted by the unanticipated rebate claims, the increased percentage of HA revenue going through private payers and the decline in our overall ASP, which Ken discussed earlier.

Second, we had an unfavorable product mix given higher revenue from businesses recently acquired combined with the impact of lower revenue from Exogen.

Overall, adjusted total operating expenses were $1 million higher, compared to the prior year as investments in selling and general and administrative expenses more than offset reductions in spending on research and development. Now turning to our bottom line financial metrics.

Adjusted EBITDA totaled $15 million, compared to $28 million in the prior year. Lower gross margin, as discussed a moment ago, drove the majority of the decline. Adjusted operating income decreased to $12 million from $22 million in the prior year.

Adjusted net loss totaled $9 million, compared to the income of $18 million a year ago due to lower gross profit and higher interest expense. Now for a brief recap of our full-year results. Net sales increased to $512 million, a 19% increase, compared to 2021.

Organic sales increased 1%, while the acquisitions of Bioness and Misonix contributed 18 percentage points of growth. For the year, adjusted EBITDA totaled $66 million. Adjusted gross margin for the year was 75%, compared to 78% a year ago.

Our 2022 adjusted gross margin reflects the impact of our Misonix acquisition along with a lower average selling price in the second-half of the year in our HA franchise, which I mentioned previously. Adjusted operating income for the year totaled $48 million, compared to $85 million in 2021.

The decrease is primarily due to lower gross margin discussed earlier and higher interest expense from increased debt and higher interest rates. Now turning to the balance sheet and cash flow statement. We ended the quarter with $32 million of cash on hand and $418 million of debt outstanding.

Our revolving credit facility remained undrawn at the end of the fourth quarter. Operating cash flow represented an inflow of $5 million for the quarter as we saw an improvement in the working capital.

As Ken mentioned, we engaged our banking partners upon the termination of CartiHeal and have amended our debt agreement to provide additional headroom and leverage and interest coverage covenants beginning with the fourth quarter of 2022 and extending through the first quarter of 2024.

Our covenants will revert back to their existing level for the second quarter of 2024. The amendment will increase the spread of our term loan by 100 basis points. Thus, we pay SOFR plus 425 basis points on our debt. We received relief against our financial covenants and project compliance through Q1 of 2024 based on our financial plan.

However, our business will continue to carry a going concern qualification based on the risk. We will not be compliant with the covenants after the expiry of the relief and for qualitative factors that remain and may impact our ability to execute effectively, which we are in the process of addressing.

Finally, due to the timing from any upcoming potential divestitures and uncertainty around the amount of rebates related to our HA business, we have decided to delay establishing our 2023 sales and earnings guidance until the impact of these can be firmly quantified.

However, as we end the first quarter, we would like to provide some color on our expectations for the quarter. We see revenue growth of low-single-digits, compared to the prior year as strong growth across Surgical Solutions and Restorative Therapies is offset by a decline in Pain Treatments.

Additionally, we expect adjusted EBITDA to be flat to slightly above the prior year. In closing, we are focused on enhancing our liquidity and improving our revenue forecasting and expanse management processes. Operator, please open the line for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Alex Nowak with Craig-Hallum. Please go ahead..

Okay. Great. Good morning, everyone. Ken, I wanted to do a little bit of a reflecting question here.

When you go back and look at the last several quarters, how did we go from -- on the Pain Therapy business? How did we go from the CMS change not expecting to have an impact to it ultimately having a greatly lowering ASPs, impacting volume, impacting the rebate claims that we're seeing here today again.

So I mean when you look back, just what did you and the team missed there?.

Yes. Great question, Alex. And I think when we look at this, what we did not anticipate is largely the percent of contracted business that was going through on our HA business. Keeping in mind two factors there, when we ship an HA syringe out, we don't know if it's going to a contracted patient or a non-contracted patient.

We don't have visibility to that for two to four quarters looking back. So as we move forward in the second-half of 2022, we saw an unanticipated rise in our contracted business that was beyond what was modeled and beyond the trends that we had in the business.

This factor alone had a significant impact, because when you look at this change from wholesale acquisition cost to ASP and then compound with a higher percent of contracted business that obviously not only weighs on higher rebate payments, which were not anticipated, but obviously weighs on your ASP because that becomes part of the calculation on the quarter that the rebates paid.

Going forward, we do feel the lights at the end of the tunnel here. The renegotiated rebates are approximately on a broad basis, 65% lower in the ASP world. And as we go into the second-half of 2023, we'll be paying those lower rebates.

And that will have the ability to modify or really solidify our price and reduce the price decline and stabilize the price and increase the price as we get into 2024. But obviously, fundamentally on the business, we'll have a big financial difference paying the lower rebates.

But that was the biggest issue, Alex, is not having the transparency relative to the amount of contracted business and seeing that increase off a slope that was not anticipated..

And I want to continue around that when things start to improve. Because in the last quarter, it was expected during a 12-month after the CMS change went into place was when you start to see the headwinds start to abate, but now it's, call it, into 2024.

So like from last quarter to this quarter, what changed there to now we're talking 2024 sort of improvement? When things get back to a growth, a stronger growth..

Yes. Well, first of all, the WACC rebates continue to impact our ASP through the first-half of this year. And keep in mind, it's a four quarter look back.

So due to the extent of the contracted business that we have and what we estimate now, the impact of the WACC rebates because it's a four quarter look back, becomes a longer process to actually fall off.

So as we start getting to the end of fourth quarter of this year and first quarter of ’24, those will be lessened that will cause price stability and actually our prices with Gelsyn and Durolane to rise as we go through 2024. But really, what's driving that, Alex, and shifting that out is just the percent of contracted business that we have..

Okay. Got it. And then just a kind of a two part question here. I just want to confirm, CartiHeal is completely off the table.

There are no further extensions that sit out there as of today? And then the second part of that is how should we be thinking about spin-offs? What is for sale? What are you willing to part with? What are you unwilling to part with?.

Yes. I would say with CartiHeal, yes, that is off the table. We have exhausted all possibilities there, and the team worked really hard to try to find solutions that made financial sense but those weren't forthcoming. So we are moving on from CartiHeal. Regarding divestitures, we're not going to comment significantly on that.

Obviously, we have a great business here at Bioventus and still a thriving business in all aspects with the headwind of HA, which will recede as we go through 2023. We'll provide more updates on divestitures if and when it occurs. But right now, we're focused on building our business the way it is.

We got a solid business across multiple specialties in orthopedics that give us a lot of room and a lot of runway for continued growth, really based on market tailwinds that work in our favor for many years to come..

Okay, understood. Appreciate the update..

Thanks, Alex..

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

Hi, this is [Allen] (ph) on for Robbie. I just had a question, I guess, looking out further to say, 2024, clearly, this year, you're still working through quite a few challenges. You were looking to stabilize quite a bit of the business.

So when we look at in 2024 and kind of Bioventus and what should hopefully be a much cleaner slate, how should we think about your top line revenue generation capability as well as your ability to continue driving cost savings beyond the $9 million to $10 million in annual savings going forward..

Yes, Allen, I can comment, and I'll let Mark make a few comments as well.

Obviously, we see a lot of ability to continue to drive growth and growth levers in our business, starts with Surgical Solutions in both our Ultrasonics portfolio, which is expanding with both the BoneScalpel Access launch and then this year, SonaStar Elite, which is a next-generation tumor ablation product.

And we continue to evolve in Bone Graft Substitutes, and the OsteoAMP Flowable continues to penetrate the market in minimally invasive spinal fusions. Across the portfolio, Advanced Rehabilitation, we expect continued double-digit growth. That acquisition came through with our Bioness acquisition a couple of years ago.

And also in that portfolio under Pain Treatments is peripheral nerve stimulation, where we expect in 2024 to launch the TalisMann, our next-generation peripheral nerve stimulation device. So those are some of the near-term growth drivers.

As far as expenses, we continue to see opportunities across the business, largely to improve our processes as we consolidate the businesses that we've acquired, we see many opportunities to improve ourselves, improve accounts receivable, our working capital, as we mentioned on the call. But Mark might want to comment further..

Yes. No, I agree with Ken's comments.

I think first, we've done a really good job over the last few months of looking at ourselves in the mirror from a cost structure perspective and making those reductions and improving our efficiencies where we think that is needed the best and so that positions us well to fight some of the headwinds we do have from an HA perspective.

And we're going to continue to look at that as we go through 2023.

I mean as Ken said in his remarks, we need to be inward focused in 2023 and really figure out how we simplify our business through some of the divestitures that we're looking at, and that brings in cash flow, but it also brings in efficiencies within our organization and allows us to focus on the more important strategic businesses.

And so we'll continue to do that and continue to look at our cost structure, find out how we can simplify and reduce costs where necessary and then improve our processes, which is an important part of our success..

The next question comes from Kyle Rose with Canaccord. Please go ahead..

Hi, this is Caitlin on for Kyle. So just on Exogen, you noted on your last call that you thought Exogen's slower-than-expected recovery would remain for the rest of 2022. So what are your updated expectations now? And what's really giving you confidence in recovery in Exogen? Thanks..

Yes. Thanks for the question, Caitlin. We saw a nice sequential growth from Q3 to Q4 in Exogen which I think shows signs of stability. And what we expect from Exogen going forward is stability. We don't expect it to be a growth driver, but we expect low single-digit growth in Exogen. The market has come back nicely post pandemic.

And that -- and this product, in particular, I think, was the slowest to recover.

And then as we mentioned, we did reorganize our sales force in early 2022 that caused a shift in some of our Exogen business just based on relationship changes, and that has now matured the sales force that is driving this, has developed new relationships and rapport that's continued to drive improvement in our Exogen business overall.

So our hopes as we go into this year is really a low single-digit grower for our business..

Great. Thanks. And just on the unanticipated rebate claims, I know you talked last quarter a little bit about how you're trying to prevent these going forward. Can you maybe talk a little bit more about how you're doing that? Thanks..

Yes. We just -- we continue to -- yes, one, I would just emphasize what we talked about is the unknown amount of rebates in the future will be much less and a lot less material to our business. So that's a positive, number one.

The second thing is continuing to invest in this area with additional scrutiny and analytics around this to make sure that we're anticipating that, further deeper analysis of the invoices that we receive and working with our different partners across the payers to understand each of those invoices and encourage and work with them to increase the integrity of the invoices that we're getting.

So I think it's really a combination of all of those to improve our confidence going forward..

Got it. Thank you..

[Operator Instructions] The next question comes from Drew Ranieri with Morgan Stanley. Please go ahead..

Hi, this is [Anna] (ph) on for Drew. Thanks for taking the questions. And for 2023, I was wondering if there's anything you could give us on cadence through the year either on revenue or margins.

Should we be thinking about seasonality similar to historical with the exception of Pain Treatments given the pricing headwind there?.

Yes. This is Mark. I'd say that we don't expect to have a lot different kind of revenue phasing, throughout the year wouldn't be a lot different than we've historically had. We don't expect any big spikes or troughs..

Great, thanks. And then for gross margin, should we be thinking about maybe low 70 as the right run rate going forward? Or maybe any color on the moving parts for gross margin into ‘23 would be helpful..

Yes. Well, I'm not going to get into a comment on that since we're not providing guidance, but wouldn't expect it to be significantly different than what we've seen coming out of the fourth quarter..

Great. Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Ken Reali for any closing remarks..

Well, thanks, everyone, for your continued interest in Bioventus. While near-term challenges remain in our business, we are confident in the revenue and earnings growth opportunities as we move through 2023. We participate in large growing markets and provide innovative differentiated products to our patients.

Most importantly, we have a dedicated team of employees that are focused on our mission and stakeholder value creation. In the coming quarters, we look to regain your confidence in our ability to execute and deliver on our commitments as we begin to improve our growth and margin profile to create stakeholder value. Thank you very much..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..