Bioventus Inc. (BVS) Earnings Call Transcript & Summary

Thank you, everyone, for tuning in to day 2 of the 2021 Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analysts here. And it's my pleasure to have Ken Reali, CEO; and Dave Crawford, the new VP of Investor Relations and Treasurer of Bioventus with us today. Before we jump in, just get to do our quick disclaimer, but for important disclosures, please see the Morgan Stanley Research Disclosure Website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

Ken, Dave, it's great to have you both here with us today. Thanks so much for being able to attend virtually. And Ken, maybe just to jump right into things at a high level here, you became CEO of Bioventus in March 2020. The company IPO-ed in February '21, February of 2021. There's been significant change since you IPO-ed with recent acquisitions just over a very short period of time. And this is all against the backdrop of being in a global pandemic. So I guess at a high level, what's the company's strategy today? And maybe how has the pandemic kind of altered your initial plans of where you were taking the company?

Well, Drew, first of all, it's great to be part of the Morgan Stanley conference, and thank you for your time and conducting this interview today, very excited to talk about Bioventus. When I joined Bioventus last year, the strategy was something that I felt very familiar with because in my time as CEO, I saw some similarities in Bioventus to my last company, which we were able to double the size of in less than 5 years with market-leading products and a strong commercial channel, which are both things that Bioventus has today. And our strategy is to leverage our significant call points across the basis of orthopedics across almost all specialties in orthopedics. If you look at it, we're a mile wide and an inch deep, I like to say, which means that we call on many specialties. We just need to sell those specialties more products than we are today. So, our strategy is to add products that will drive accretive growth and allow us to go deeper with our customers and leverage our commercial channel, leverage those relationships in orthopedics. Now you speak to the pandemic. Certainly, that's been a challenging time and a challenging time for all, for our country, for the world, for health care in general. And I can say I'm very proud, very proud of the Bioventus team and our ability to serve our customers and ultimately, the patients that we serve, over 0.5 million patients each year now that benefit from our technology. And we've been unwavering in that. The business performed very well last year. In 3 out of the 4 quarters in 2020, we grew over prior year. Q2 being the only situation where we had negative growth due to the significant shutdown that we had and obviously, have hit the ground running this year. What you see unfolding at Bioventus is part of the plan. This has been our strategy since I started. And certainly, you saw the ability to scale the company through M&A and through good product development, leveraging what we have and the significant infrastructure that we have. Going public was a key piece to that. It provided us the ability to retain and grow our talent, which I really view as the critical aspect at Bioventus is the people that we have, the culture that we have, being public and the ability to offer our key employees, stock options in the company and have that transparency was absolutely critical. It makes us more competitive. It also expanded the aperture on our M&A, being able to look and actually accomplish deals like Misonix, which is a pending acquisition, we expect to close in the fourth quarter was truly something that going public, allowed us to really contemplate and look at seriously. And it gave us access to the capital markets, which certainly we plan on leveraging -- will leverage in the medium and long-term, as the company continues to grow and prosper. At the end of the day, our goal is consistent double-digit growth. Bioventus has consistently grown since its inception as a division of clinical therapies, part of Smith & Nephew in 2003, and it has consistently grown since that time. I have a unique position because I was with that division as General Manager for a short time from 2005 till late 2009 when I left to become a CEO, but certainly have witnessed the significant opportunity that is Bioventus. And ice felt coming on board as CEO, it fit my skill sets and it's something I could leverage. And now, we're just actually executing our strategy.

Great. That's wonderful perspective. And just to head on COVID for a moment before we kind of go into some of the businesses more in depth. But just on the second quarter call, you noted ongoing procedure recovery was continuing into the third quarter. We've had some companies suggest kind of a stable environment at this point. But is there anything that you're seeing kind of as we're progressing through September that's more concerning or more surprising? Are you seeing any positive trends kind of in your businesses?

The only thing we're seeing probably that is more concerning in our aspect, Drew, is a little more pressure on elective procedures regionally. So, this would be in states like Florida, Texas, some aspects of the West, where, I would say, in the past month, there's been more pressure on elective procedures. That's a small piece of our business, fortunately. It just impacts our bone graft substitute area, which is about less than 20% of our revenue, but we have seen that aspect move. The rest of our business, as we reported after our Q2 call, has been very stable. So I would reiterate that aspect. Patients are going into physician offices, which is a key piece to us. As I always say, as long as patients are comfortable going to see their physician to get their HA injection or get Exogen prescribed or even have a PNS device peripheral nerve stimulation device and planted, our business is going to be healthy. But we have seen a little pressure on the elective procedure side a little more so, I would say, in the past month, and that seems to be rolling. It seems to be on again, off again, depending on the geography and what we're talking about. But that would be the only change I would highlight. Everything else has been pretty stable with what we said a month ago on our call.

So 3Q is essentially kind of the pivot point in your guidance, and you would expect to see more of a normalization in growth trends through 3Q and into 4Q, is that kind of the right framework to work with?

That is correct, Drew. Absolutely. As long as the pandemic doesn't worsen, obviously, that caveat. But no, we're very encouraged by what we're seeing in our business overall.

Got it. Great to hear. And maybe let's just touch on the business segments and shift gears for a moment. But kind of at first glance, the Bioventus portfolio seems a little disjointed, had part in the pond. But I mean, how are the segments interwoven from a clinician call point perspective? And maybe talk about the cross-selling opportunities. You mentioned in your -- kind of your opening remarks that you're mile-wide and an inch deep, but just give us some framework there.

Yes. Obviously, our market is orthopedics, but the orthopedic market, as we all know, is very specialized. So we divided our company into 3 verticals, 3 very distinct verticals, the pain treatment area, which involves our hyaluronic acid, which treats osteoarthritis pain as well as our peripheral nerve stimulation area. And then, we have restorative therapies, which involves our Exogen product as well as our advanced rehabilitation area and then our surgical solutions area, which is largely our bone graft substitute area today. If you break those 3 down, the pain treatments area is largely in sports medicine and total joint reconstruction. Restorative therapies is a combination of the lower extremity area, as well as areas such as hand surgery and trauma that are used to treat fractures with Exogen. And then in rehab, which is part of that, that is a separate sales force we use to call on large rehab facilities, such as the encompasses of the world and penetrate the Bioness products that restore gates. That's also an area that we're bringing into orthopedics as well, and we're pretty excited about that, particularly for post total knee patients and restoring their gate where they have weakened quadricep muscles. And then on the last side with the vertical, the bone graft substitutes, that's largely spine. So that's spine and neurosurgeons. So when you break it down, there are 3 specific customer verticals that we're focused on. And as you said, Drew, mile wide and inch deep, and our goal is by going 2 to 3 inches deep with those customer verticals I just highlighted, we're going to double or triple the size of the business as we go forward.

Got it. And with just the new OA business to kind of drill in a little bit there. There -- we had AAOS last week, but just curious if there was anything that you saw coming out of the conference that maybe was more supportive of kind of the broader HA utilization trends or any signaling on guidelines or guideline updates there?

Yes. We haven't seen anything come out publicly yet that I'm aware of on AAOS just stance on HA. Certainly, some years ago, they made a stance on HA that was not completely endorsing the technology, but also provide an option for surgeons to utilize it. Since that time, I would say that the HA market has continued to grow and prosper. And today, it's reimbursed by Medicare and nearly every private payer. We do feel very good, though, about our position in HA. And specifically, I'll highlight Durolane, our single injection product, and that's our fastest-growing area as a single injection market continues to grow faster than the overall HA market, and Durolane is still significantly underpenetrated and just launched in 2018. What makes Durolane unique, though, is its high molecular weight. It has, we believe, the highest molecular weight out of an HA product. That is an area that we think AAOS and other societies may focus on in terms of enforcing high molecular weight and its ability to have higher -- longer residence time in the knee. So, we feel very good, Drew, about our position there and where we stand, not only with Durolane, but with GELSYN, our 3 injection and SUPARTZ, our long-standing 5 injection. We offer the broadest range in HA with the largest sales force and really a strong market access strategy that we think will drive continued growth and penetration for us. We're the #2 player today in HA and certainly think we'll continue to outgrow the market in the foreseeable future.

And just with Durolane specifically, there's been some comments in the past made that single injection trends were accelerating kind of during the pandemic. So just, one, are you seeing any continuation of that? Is that just being helpful to the overall growth rate? And just as we're sitting here in the middle of the Delta variant in the regions where you are seeing more pronounced impact, patients are still going in to see their doctor, but are you seeing step-ups in Durolane usage?

Yes. It's hard to quantify that. We certainly anecdotally saw that last year, Drew, for sure. And for obvious reasons, the patient can visit the doctor's office once every 6 months and really mitigate multiple offices. I would say, though, through Q2, we have seen a nice bounce back in all of our HA business, not just Durolane, but certainly GELSYN, our 3 injection as well as SUPARTZ, our 5 injection and really haven't seen that change through the Delta variant at this point in time. Why is that? I think a lot of it you can point to is the customer base, the patient base, more specifically that HA serves our people largely from their early 50s to their early 80s. This is a group that is highly vaccinated that is comfortable going to their physician offices even for multiple visits. So some of this, we've seen them return to their normal HA injections, which maybe they went to a Durolane and then went back to a 3 or 5 injection. With all that being said, I do think there's tailwinds on the single injection through the pandemic. I just can't quantify it, but we have seen probably more normalization of the market in the past couple of quarters than it was a year ago.

Got it. And moving past kind of the new OA business for a moment, but just to highlight bone graft substitutes and the -- your Exogen product. And just talk about the growth opportunities for the company in both of those categories. How should investors kind of think of market growth for both of them and bone graft substitutes is tied to spine. But help us think through Exogen and how you kind of envision the growth rates for both of those segments at Bioventus?

Yes. The bone graft substitutes, we're particularly excited about. We've been the fastest grower in this market now for many quarters, and we're still at 4% to 5% market share. So, we're still a small player, Drew, but we think we have a terrific technology, leading with our OSTEOAMP, which is a minimally manipulated allograft that comes in many formulations. We just announced in July the launch of flowable OSTEOAMP, which allows the product to be injected, which is particularly relevant and minimally invasive spinal fusion. So that has gone very well, and we see ourselves continuing to grow in a market that's growing in the mid-single digits. We see ourselves continuing to grow double-digits in bone graft substitutes for the foreseeable future. This will be about an $80 million business line for us this year and certainly see this going well above $100 million in the not-too-distant future. And certainly, part of the Misonix' thesis on the acquisition allows us to leverage the bone graft substitute area with their BoneScalpel device, the decompression device. So often decompressions and infusions are done together. And this will allow us to use both products and utilize both products and both being agnostic to spine hardware, which has been a key part of our strategy with bone graft substitutes. We don't go in and have to play the spine hardware politics or game with the hospital, but can really convert a whole hospital to our bone graft substitutes and every surgeon, whether they're a Medtronic surgeon or a Stryker surgeon, they'll use our bone graft substitutes because we have great technology and great products, but we can also, in some cases, by doing a whole switch to a hospital, save them from a monetary perspective as well. As far as Exogen, we are the #1 player in fracture healing and bone stimulation. This is a market that I know quite well and go way back in my career in bone stimulation. And I'm very confident in saying, I believe Exogen will continue to be kind of a low- to mid-single-digit technology growth player for us. That's about where the market is growing today. And we just have a terrific business that has been built over the past 25 years with Exogen, and we feel we'll continue to serve our patients well, grow with the market. We have particular support, strong support from payers with our payer contracts based on the strong clinical data with Exogen, and of course, with Medicare. So we have a good ability and a very good story with Exogen and continue to see our ability to leverage Exogen, not only for the growth that it is, but as we complete the Misonix acquisition, we're particularly excited to give our Exogen sales force the wound products at Misonix to sell into the office, the lower extremity office space, which is an area that Misonix has not been able to hit with their sales force in wound, which is focused more on the wound centers and the hospitals. So we see that as very complementary. And our research that we did, that was an aha moment is the fact that we realized that a lot of the surgeons that we have and over 4,000 that we're able to quantify that prescribe Exogen every year also treat wounds in their office. And this was a shift that was made in the pandemic, and we think we can leverage that. So we're pretty excited about that as well, Drew.

Got it. And Misonix is definitely a topic I want to hit very shortly. But maybe just to start on Bioness, your transaction earlier this year, but just can you discuss maybe in more detail the commercial and operational strategy there? Where are you in the integration process? And now that the acquisition has been in-house for a couple of quarters now, I mean, do you see further abilities to really kind of leverage your orthopedic customer base or any synergy opportunities there?

Yes. Let me take a step back and explain how we got to Bioness. We did some work last year, shortly after I started with an outside consulting firm, looking at adjacencies in our business. And the area that came up that was particularly intriguing to us was the peripheral nerve stimulation market. With the opioid crisis really being a significant issue in orthopedics as a lot of orthopedic surgeons prescribe opioids post-surgery for post-surgical pain, we saw that as a synergistic opportunity, synergistic with our call point across sports medicine, total joint reconstruction and lower extremity, all areas that would use peripheral nerve stimulation and certainly addressing the opioid crisis. That's how we originally found Bioness is through the StimRouter, which is their current technology, a terrific technology that was launched of 2017. As we started looking at Bioness, we saw and looked at the other side of their business, which is the advanced rehab business, which has been growing double-digits for them for the past several years, and they've done a really nice job with a direct sales force in that area. But more importantly, we saw the applicability of that technology, particularly their gate restoration products to be used in orthopedics, where it's an area that they didn't have the size or scale to really leverage. And this can be used in orthopedics for post-surgical treatment of total knee patients who have weakened quadricep muscles. Their gate restoration products is something that's been piloted in some major institutions across orthopedic institutions across the United States, and we look forward to bringing that more broadly to orthopedics. So that's the basis for Bioness and the acquisition are those 2 areas. And it's gone quite well. It's actually exceeded our expectations in terms of growth in the near term and certainly in terms of synergies. And we expect to be largely complete with our integration of Bioness by the end of this year. And the team has done a terrific job in this regard. It's something that for Bioventus, we've learned a tremendous amount in terms of integration and our integration management office and the leadership that the team has brought to this integration, and we'll certainly be able to apply that to Misonix, but it's been something that, for us, has been a terrific experience, and we look forward to going on to the next integration once Bioness is complete later this year.

Got it. And just on Misonix for a moment, I know that you weren't contemplating revenue synergies in the deal model. But you highlighted a few buckets, I think about [ 3 ] buckets of potential revenue synergies on the call, but maybe just detail those a little bit more? And maybe how do you kind of envision the long-term growth of Misonix? I mean it sounds like there's a lot of potential to cross-sell within the existing Bioventus portfolio.

Yes. We're very excited about this area, Drew, and really view Misonix as a key catalyst, and this is a true classic 2 plus 2 equals 5 in many ways. And it starts with the surgical area in spine. Both companies are agnostic to spine hardware, both have technologies in our bone graft substitutes and their BoneScalpel that are underpenetrated, but have been growing very fast over the past many quarters. Commercially, we use sales agents. They use a direct sales force, and we see our ability to leverage both sides of this equation to allow us to penetrate the market faster and further than both companies are doing today by really focusing on the customer. We will take it down to who has the strongest relationship with the customer and leverage that point to sell both technologies, bone graft substitutes in cases where it's a BoneScalpel customer or our bone graft substitutes and certainly in cases where it's been a Misonix customer in the past. So leveraging those 2, we're 4% to 5% of the bone graft substitute market today. They're a small percentage of the total number of decompressions done that's in the single digits. And we think by getting both products in the same bag, we'll be able to leverage and get to higher market share very quickly with a larger sales force, combined sales force. As far as on the wound side, very similar in terms of expanded call point opportunity by bringing their wound business to our Exogen team and allowing them to sell it into the office to our customers that are treating wounds in the office, keeping in mind that, that lower extremity area where diabetic foot ulcers are treated is about 30% of our Exogen revenue. And as stated, it's about 4,000 of our customers today that prescribe Exogen that treat diabetic foot ulcers in their offices. We will keep the wound business intact in terms of their call points, which have been focused in the wound centers and the hospitals but see the ability to expand our Exogen business there, potentially with new customers that may not be using -- utilizing Exogen today. Certainly, we don't have the whole market on bone stimulation, even though we're the market leader. So we see opportunities there to grow Exogen as well.

And coming up to the time here, but I want to make sure we hit on a couple of other topics. But just with Bioness, with Misonix, they broaden your portfolio. So with both of those kind of now in the bag, I mean where could Bioventus now go maybe from a business development perspective that legacy Bioventus could it be for? And maybe it's a good opportunity to just kind of remind us where the overall -- or what your overall M&A strategy is at this point?

Yes. Thanks, Drew, for that. Look, we'll continue to look at M&A as a key lever for growth. And our mantra is accretive growth. So we want to consistently grow double digits, and I believe we can as a company and double the size of our business over the next, call it, 4 to 5 years through a combination of M&A and product development that leverage our commercial channel. We'll continue to compete in white spaces in orthopedics, areas that a lot of the major players in orthopedics maybe don't focus on as much or pay attention to, but we'll hit it with innovative technology that we think can lead the market. That's what we've been able to find. That's what we had at the organic core of Bioventus with our HA business and products like Durolane or products like Exogen or products like OSTEOAMP, our bone graft substitute area. Now we've added differentiated products from Bioness and StimRouter and launching next year is TalisMann, the fully implantable peripheral nerve stimulation area. And then products like the L300 or L360 Go, which are innovative products that restore gates. Bioventus will always be known for providing innovations, innovations that restore active healing to patients. We think we'll consistently be able to grow in the double digits based on that mantra. There's a lot of opportunity out there and allows us to continue to expand and grow based on the -- just the amazing momentum in the business that we've been able to achieve here in the near-term as we've moved forward from 2020 into 2021.

Got it. And I'm going to sneak in one last question here. [ This is all ] in Agili-C, you decided to move forward with the acquisition. The $50 million is in escrow. I think some investors might have had initial concerns or maybe potential question marks on the data, but just you're moving forward with the acquisition. I mean, how confident are you in that product? How does it kind of fit into the portfolio at Bioventus?

Very confident, Drew. We took a hard look at not only the data, but the commercialization pathway. This is a $1.3 billion market we're entering, once Agili-C receives PMA approval. It's a breakthrough designation by FDA. And we feel it will be a significant player and really highly synergistic with our call point in hyaluronic acid with sports medicine and total joint reconstruction surgeons. So we're very excited about it. We did our homework. We know how we're going to launch it and commercialize it in the years to come, extremely excited to offer this to patients not only in the United States but across the world as we move forward. So for us, that was a huge milestone, one that we didn't take lightly and really a credit to our team, who did an amazing job on the diligence aspect. We really feel like we know where we're going with this product and the technology.

Great to hear. And with that, we're at the top of the session. I feel like we could have talked for another 30, 45 minutes. So Ken and Dave, thanks so much for joining us today. We really appreciate the time.

Thank you, Drew. Thank you for your time.