Bioventus Inc. (NASDAQ:BVS) Q1 2023 Earnings Call Transcript

Bioventus Inc. (NASDAQ:BVS) Q1 2023 Earnings Call Transcript May 16, 2023

Bioventus Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.15.

Operator: 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.

Dave Crawford: 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.

Tony Bihl: 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.

Mark Singleton: 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.

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Q&A Session

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

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

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

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

Operator: 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.

Tony Bihl: 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.

Operator: And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.