Bioventus Inc. (BVS) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining another session at the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analyst here, and it's my pleasure to have Bioventus, the CFO, Mark Singleton; and Treasurer, IR, wear many hats, David Crawford. Before we jump into Q&A, just a quick disclaimer, about 4 important disclosures. Please see the Morgan Stanley research disclosure website. And if you have any questions, reach out to your Morgan Stanley sales rep. With that said, let's kind of jump into it. Mark, over to you, but it'd be great to kind of get your kind of first impressions of the company. You're very early on in your role and management transitions kind of happen when something needs to change for the better of the company. So maybe just talk about your background, your experience, what that brings to Bioventus and kind of how that might inform the strategy going forward.

Yes. Thanks, Drew. Appreciate you having us today. I'll just kind of start when I looked at the opportunity of coming to Bioventus and really evaluated the portfolio and the products and the opportunity that was here, really excited about it. I think when you think about our company, 10 or so years ago, we were a 2-product companies spin out of Smith & Nephew. Over the last 2 years, we've taken a couple -- 2 or 3 acquisitions. We bought Bioness, Misonix and now CartiHeal, when you look at those acquisitions, it really added a lot to the portfolio and it really turned us into a diversified portfolio company that gives us a lot of growth levers. We have HA in the short run. We have Exogen, which are original 2 products that really set the base for us. And then if you look at the TAMs on Bioness from the PNS market, a $6 billion TAM, a lot of opportunity there. If you look at CartiHeal, the TAM there is $1.3 billion in North America, north of $2 billion from an overall global perspective and Misonix is a really good growth driver for us in the short run. So I feel really good about the opportunity. And then I kind of look at the experience that I have coming from Teleflex was a part of some of the integrations there and some of the acquisitions that they've done -- learned a lot about that from them building that company. I think there's a lot of similarities if you think about how they built their company and how the team here started to build that and really think that I have a lot to bring to the table from an execution perspective, which I think is really where we're at in the life cycle of Bioventus as we've made all these acquisitions, diversified the portfolio and now it's all about executing, putting those management and systems in place to hold people accountable to drive the operating margin higher over the long term and really focused on that. And I think that I have the skills that I've learned at Teleflex, brought the Teleflex and only going to bring that into here, really helped the integration. I think the culture of Bioventus is also a good fit for myself. And I think there's value that I can bring there to make it even better as well. And so really see this as an opportunity for myself and just from a career perspective, but really excited about the opportunity that we have and executing on that and bringing success over the long term.

And kind of as you're looking into the back half of this year into 2023, I mean you laid out a lot of goals, targets that you'd like to work on? I mean, is there kind of a #1 priority as you're kind of thinking about ramping up commercialization for some of the newer products like CartiHeal or even Misonix or is it more on really the efficiency side on the operational side?

I think it's all of that, but it's really execution. So we have the 3 acquisitions that we've done, making sure that we're getting our processes in place to manage them. I mean $300 million company before with Smith & Nephew, north of 550-560 range of revenue for us now, and it's really about in the back half of the year, getting Misonix integrated, transitioning from -- with a WAC to ASP transition with the team. We just got done from a Misonix perspective of doing our SAP implementation. So there's a lot of execution things that we're really trying to focus on to achieve our goals for 2022.

Got it. Great. Maybe to focus a little nearer term, but last week's commentary and kind of this week's commentary, we've heard that procedure volumes in June, July were down because of some of the vacations or at least elevated vacations versus maybe 2019 levels. And there's kind of been an improvement in August and even into September. I know that really Surgical Solutions might be more of the procedure-oriented category since you're dealing with Spine. But is that kind of what Bioventus has seen at least into the quarter? And are you kind of confident in the Surgical Solutions growth in the third quarter and into the fourth?

Right. Yes, I think we -- as we kind of commented on our earlier earnings call, we definitely saw an impact from Omicron early in the year that didn't allow us to get off to the start to the year that we wanted to -- but we saw that sequentially improve in 2Q from 1Q and we're seeing steady improvement into 3Q. I think there's always some of the vacation impacts that you're talking about. But our expectation for the back half of the year is that procedures continue to improve. I guess the other thing I would talk about there as well is that the surgeons and the hospitals want these procedures to come back just as much as we do these procedures that we're involved in are definitely very profitable procedures for them. And so they're just as motivated to have that return to normalcy as we are. And then as you kind of alluded to, is really, our portfolio from a surgical solutions perspective overall is like 25% or what we think is affected by hospital staffing is really only 25% of the portfolio. Again, that just take you back to kind of the original comments of just a statement of the diversified portfolio that we do have. So while there is some impact there, it's not -- we have other levers that are going to continue to drive the growth and keep us headed towards our goals.

A tough question, but do you have a sense of where -- or how much staffing shortages is maybe limiting your capacity or growth in some of the procedure-oriented categories?

I mean I don’t want to put a name on it, but it's definitely a number on it, but it's definitely more focused on just the surgical solutions part of it. But I think that was one of the reasons our double-digit growth story that we go back to through the first half, we're in that 8% growth, but 9% constant currency. With that and a few other things, we would have been closer to the double-digit growth in the first half.

Okay. And maybe kind of on the first half, second half and thinking about your guidance for the full year, you kept organic growth unchanged from the second quarter call. So you did about sub 9% in the first half. Just help us bridge to the back half growth to kind of shake out at your overall full year organic growth guidance -- what are the factors there?

Right. So I think if we think about that 8% to 9% through the first half, you really had the Omicron staffing that we just talked about that held us back from the double digits. Then we had 2 other challenges we -- in our advanced rehabilitation portfolio. We had some supply chain challenges there on some electronic components that prevented us from shipping some -- a big amount of backlog there. And then we had some MDR issues that were holding back some of our products from an international perspective overall. If you put all those 3 together, I think we had identified that as an estimate of $3 million, that would have put us north of that 10% double-digit growth coming out of the first half.

Got it. And with the events rehab side, I mean you're confident that the supply chain manufacturing piece has been fully resolved. And are you kind of back -- well, you're still in the market, but are the back orders actually being eliminated so far into 3Q and into 4Q?

Yes, we saw that immediately recover in July where we got the supply, the manufacturing of supply is now coming off of that we're turning -- taking it from the supply we're getting into the manufacturing line and getting the output of the manufacturing line at the level that we have planned for in the second half. So that's already on track. MDRs, we're making good progress. Our AQA contact has really got a good sense of urgency working with the governing bodies on that. We're getting positive feedback of the MDR. MDR is obviously affecting the European market, and I think we're expecting that to recover in early 4Q, would be the latest, but we're getting really positive feedback from that from working through that issue with them and so far so good on that.

Got it. And international is about 10% of revenue...

Agree.

And just with some of the more difficult regulatory environment that's happening in Europe, I mean how are you kind of thinking about international expansion? I mean you have Durolane, you have many products already approved, but just in terms of thinking about a growth company and getting your portfolio registered in other geographies, how are you kind of thinking about that from a regulatory perspective...

Yes. Our biggest presence right now is in the European markets and just navigating the MDR, we have the issue we just talked about that held us back in 2Q. There's other things that we're working through, but we're not expecting major disruptions from an MDR perspective going into those markets and really trying to be proactive on those to where if we anticipate some things that we're going to have to work through similar to this one to where we're building our inventory ahead of that, making sure that we can that we don't leave ourselves in a position of not having a product to sell into those markets. So just being smart about that. When you look at internationally from a strategic it to another growth driver that we have in our portfolio. So think about diversification from the number of products we have, but also from the market opportunities that we do have. And so this obviously 5 to 6 months into the job, that's something that we're spending time on long term, that's definitely a driver for us. But I think our approach on that is really not a shotgun approach. It's more about we're going to make really strategic targeted investments in those international markets and try to go deep and then build from there. And so that's really how we look at those international markets. But right now, we obviously have the biggest presence of the majority in Europe. We're not really in the Asia Pac and the Latin America markets with any significance. But those are ones that we'll be thinking about in the future.

Got it. And I think like we're thinking about the company as like a low double-digit grower organic grower. International is only 10% of sales, but it's been a pretty high-performing segment. So just talk about how that fits into your overall growth algorithm and also to on the other segments, some of the opportunities that are really needle-moving for the company as you kind of look into 2023?

Yes. I think when you look at really 2023, and we kind of walk through the portfolio, it's not going to be significantly different than 2022, I'd say. We expect HA to continue to be a good growth driver for us. We look at some of the Misonix portfolio, certainly going to be a strong double-digit growth driver. That's going to -- should continue to accelerate as we get the integration done and we add some of the products into that portfolio. We just came out of the summer sales meeting that we've had in early August was the first meeting that we've had face-to-face with our sales force period, but then obviously really bringing together the Misonix sales team and the Bioventus sales team and bringing those 2 teams together to get the sales force from Misonix familiar with the legacy Bioventus products and then getting the legacy Bioventus reps, familiar with the Misonix products. And I think if you look into 2Q, we're already seeing some progress in that and bone grass substitutes had some strong growth in 2Q. Then as we transition into 3Q and 4Q as both sides of those teams become more familiar with the portfolio, we'll continue to see progress. But I think when you break down bone graft substitutes as a shorter sales cycle, we can maybe get that into the customers quicker. Whereas on the Misonix side, the sales cycle is a little bit longer there. So it takes a little bit longer, but we -- sequentially, we'll continue to see momentum with us.

I know Misonix might not necessarily be considered capital to a degree, but I mean there's still -- and you're talking about at least a longer selling cycle, but at least for some of the capital components within the portfolio, are you seeing that more broadly? Or are you kind of able to still go through that? I mean, I would imagine demand is still there, but just is it taking longer for hospitals to go through the capital decision and evaluation decision that you're...

Yes. So currently, our -- from a capital perspective, we're not actually selling that today. We're actually loaning that and consigning that out to the hospital and then driving the utilization of our, is kind of the razor blade model with that today, but also looking at into the future on really generating revenue from those capital sales as well.

Got it. Maybe let's go to HA before we kind of touched on Misonix. But I mean, earlier in the year, there was the big debate about what Medicare changes in pricing regime will kind of due to the HA market. And I think if I kind of go back and look at your updated guidance, I mean, it sounds like you're kind of baking in some potential disruptions in the marketplace. But for 2 months, roughly 2 months after the change, I mean, are you seeing anything from an underlying utilization perspective that's giving you concern that there is going to be disruption in the HA market as a result of the change...

Yes, obviously I’m new to the HA market, but I will tell you, I really have a lot of confidence in the team that we have navigating us through that. And so far, for the first 2 months, it's progressing as we had it expected and have modeled into our numbers. And so that's kind of as expected.

Is that -- is there any disruption though that was kind of baked in there? Or is it kind of still...

Yes. I guess I guess what adjective you want to put on it disrupted or choppiness, Yes, we expect a little bit of choppiness in the back half as we make the transition from WAC to ASP, but it's kind of all built into our models.

Got it -- and you have UnitedHealthcare and Cigna, just post kind of this regime change or Medicare pricing change? I mean, is there additional opportunity? Or are you even looking for more exclusive contracts with commercial insurers. Is that more important now than it was before kind of Medicare pricing changed?

I think we're going to -- we feel really good. I mean, Cigna has just come on. I mean between Cigna and United that gives us really access to preferred lives and a lot of leverage in the market. We believe that's going to help us going through the WAC to ASP transition, we have adjusted our contract with them from the standpoint of the rebates favorability that was associated with the WAC going to the ASP world. But we're always going to be looking at new partners and not just going to take on any one partner. It's going to be strategic about it where does it make sense in the part of the country that they have presence in that maybe we don't and really kind of just evaluating those to make sure that they make sense for us and make sure that, that fits into the sales team and all of that appropriately. So yes, we're always going to continue to evaluate that. We want to make sure that it makes sense. We're not just out there trying to get whatever additional payer contracts that exist.

Got it. Let's move over to CartiHeal. I mean it's an exciting opportunity for the company. Maybe kind of what's the road map from going from your limited launch or limited commercial launch and translating that into a full commercial launch? Is it really just kind of waiting on reimbursement? Maybe just talk to us about what investments you need to make on the commercial side. It doesn't sound like it's really like building out a new sales force or anything. But what's A2B in terms of getting you to full commercial launch?

Yes. I guess I just want to emphasize how excited we are about CartiHeal, Again, just the TAM associated with CartiHeal is significant, right? $1.3 billion opportunity in North America, north of $2 billion from a global perspective. So a lot of opportunity. You look at the clinical evidence, the superiority and the clinical evidence that we have for this product. If Ken was here, he would say that, that's like the most significant clinical superiority that he's seen in his 30 years. That just doesn't really happen in the orthopedic space today from the evidence that we have. So we really feel good about the differentiation that we have in that product. And again, when you think about it from an investment perspective, the investment relative to other, I'd say, new exciting products really is behind us. So we're going to have to make investments in this. But as you talked about in your point, we have the sales force, we're going to drop this into their bag. They're going to be selling this. So it's not like we're going to need to add a bunch of reps. And so when we start hitting our stride with this product, that gross profit that we generate from the revenue is going to drop to the bottom line and really help us be a lever to increase our operating margin. But the key to all of this is reimbursement, as you kind of talked about. And so in that, you look at the first year, our expectations are really trying to be deliberate and be measured about this. In the first year, we have our -- one of the milestone payments that we would expect to be paying in September of 2023 is the first 100 cases. So that's when we expect to achieve 100 cases as pretty much a year from now. And so between now and then, this is starting to do some of those cases in the slow so we're going to do some first cases in the fourth quarter in Europe, first cases in the U.S. It's really getting into the reimbursement. So when this product was approved by the FDA, we got a category 3 CPT code, and that's kind of just a generic code that you get when the product comes to market. That doesn't really do a lot for us. And so our job between now and going forward is really about cross walking from a CPT code. We want to get this to a Category 1 CPT code, and that's where really the value of the CartiHeal asset is unlocked. But between now and then, it's working with the surgeons to crosswalk the patients over to a code that makes sense until we're permanently given that category 1 CPT code. So it's really about trailblazing the cross-walking that code over to our the patients to allow this to gain momentum. And so we're really going to be deliberate about that process, working with the surgeons in the first year to make sure that we get that right and then accelerate from there. So we really see from a materiality perspective with CartiHeal, really see that in the 2024 time frame.

The only thing I would add to, Drew, is like one investment we have made as a consultant to help us with that process. So we're not doing it on our own either.

Agree. And for setting expectations for next year, I mean, would you be disappointed if there wasn't like at least the $5 million, $10 million contributor to the top line, kind of just understanding that it is going to be kind of a deliberate process in '23.

Yes, that's an aggressive number. I think that we really got to think about it as if you think about the 100 cases and kind of do the math around that. So it's going to be what I would say is an immaterial amount for next year, really about getting the reimbursement right to help set us up for success and then lack of value that we have for the long run.

And could that accelerate into 2024? And then once you get reimbursement, that's really...

Yes. I think after we get through the first 100 cases and get more confident about it, that's when we'll kind of take it from there. And that's, again, I think, what I said earlier about really expect more of a material amount to start in 2024. And then it really becomes about this crosswalking process that if we gain a lot of momentum on that, that will be really what will be -- that will be the key to success and whether we're able to do more earlier or not.

And with CartiHeal and kind of with Misonix leverage in the company has kind of moved higher over 5x now. But maybe what are your thoughts on deleveraging maybe into the next round of M&A? I mean, to me, this is kind of a story of kind of rolling up assets, broadening the sales bag. But just how are you thinking about deleveraging here and kind of the milestone payments on top of maybe just improving your margin profile of the company?

Yes. I think that really this -- we think about delivering -- I think it just -- but we also talk about the diversification that we've had that I talked about in the beginning as we have a lot of tools here, right? We have short-term tools in the bag. We have long-term tools. CartiHeal is obviously a longer-term asset. But delevering is really comes back to what I think is really -- what we're focused on right now is really executing, doing what we say we're going to do, improving our processes, holding people accountable, driving the results internally, taken this time to when we don't really have a choice to do more M&A and getting better internally on executing and doing what we're saying we're going to do, making our processes better, evolving our processes to absorb these more complex businesses that we've taken on. And so really focused on that in the next 18 months. And when I think about M&A, I don't really want to put a timetable on that because I do think I think maybe some people look at this leverage position that's put us into where we don't have a lot of choices to do at M&A. But to me, it comes at the right time because we do really need to, with me coming in new, and I think really have a good background on executing, managing the P&L. That's what we're going to be focused on over the next 12 months. So kind of being on the sidelines is actually a good thing from my view for Bioventus right now to really absorb these assets and go from there. And then when we look beyond whatever that timetable is from an M&A perspective, we're really going forward, going to be looking at EPS accretive deals, right? I think when you look at Misonix and CartiHeal, obviously dilutive on the earnings side in the short run, but they're, again, have brought a lot to our company, giving us a lot of levers for the long term and really feel good and really feel excited about that. But really, going forward, when we look at deals, we want to be pursuing deals that are accretive to EPS in the real short run, right? We want to take them on and make sure we can get EPS increase and accretive straight away. So that's where we're going to be focused whenever that day comes. But right now, it's really about executing and doing what we said we're going to do.

Got it. And maybe just on cash flow for a moment, but I feel like the story is kind of focused on growth and more of the margin profile, and there hasn't been much discussion on free cash flow, maybe, post some of these deals. But are there any goalposts that you can provide for maybe how to think about free cash flow and with your efforts to kind of work on efficiencies from an operational standpoint? Like what could we maybe expect to see on working capital or CapEx into '23.

Yes. That I think really all of those things are, again, execution. But I think when we think about the free cash flow, obviously, over the last 12 to 18 months, there have been a lot of cash going out the door from an integration perspective. And so that is continuing to get better every day, every month. So that's managing the business, and that's improving. We are going to have some cash flow headwinds with some of the milestone payments and things like that, that we have with CartiHeal, that will offset that a little bit. But then you get into the working capital areas of managing AR, managing inventory, making sure accounts payable, that is really execution, right? So when I talk about really focusing on execution, we're going to be focusing on those areas, right? And Dave is obviously his expertise in treasury is really helpful there as well. And so really focused on converting our EBITDA to deliver in the cash on the bottom line, but there are some natural things that are going to make that better, but we got to step up and make sure that we're managing that as we should as good stewards of the P&L.

And I think with the integration, that's when you're going to see some of the impact coming from working capital as we get things combined and more effectively working through processes. We just integrated from an IT perspective, Misonix just a couple of weeks ago. So that's another lever that I'll keep that process. We'll probably need to build some inventory next year for temporary as we move from Farmingdale over to our facility in Memphis for our manufacturing for Misonix. So there will be some ebb and flows -- but longer term, definitely a big focus on working capital to an improvement to unlock some value there.

Got it. Got it. Maybe with ‘23, I know it's maybe a little too early to give guidance for next year, but just help us kind of with -- you touched on kind of the growth puts and takes for next year, but maybe just spend a little bit more time on the profitability side. I mean the macro environment is still a bit uncertain. But just kind of walk us through maybe what the gross margin progression could look like next year and really where you're going to deliver the leverage on the SG&A side and even kind of R&D?

Yes. I think when we think about that just from our expectations, obviously, delivering on the double-digit growth, which is what we've talked about and committed to. So improving that operating margin starts with the top line. We already have a good gross margin that we -- in the mid-high 70s. So some of that will really good drop through to the bottom line. So then it's really about OpEx and making sure that we're growing our OpEx less than we're growing our revenue, right, and making sure that we're increasing that margin over time. And so eventually, to me spending a lot of time on that OpEx line, making sure we're looking at investments closely and really being smart about driving efficiencies there to increase the operating margin that we have. And then at the more that we do that, the more, obviously, we'll be able to help us from a delevering perspective.

Got it. I know we're almost out of time, but maybe to touch on a couple of products. But with the launch of SonaStar Elite Soft launch in the fourth quarter, I mean, this is kind of like a new entry for you in terms of the neurosurgery space. I mean, you're touching many areas, many specialties now, but how are you kind of thinking maybe about building a neurosurgery business over time? Is that a priority for you as you're kind of looking at doing deals or even on an organic basis?

Yes. It's not really a priority for us right now is again, from looking at deals, we're not going to be focused on that. We're going to be focused internally in executing on what we do have. But I think the SonaStar Elite is a great example of us leveraging the platform, the Nexus platform that we brought into Bioventus with Misonix and really kind of does expand some of that into neurosurgery, but also there's also some synergies from the call points and sales reps that we have right now to where we're not going to have to add a bunch of sales reps to be successful with SonaStar Elite. So it's another example from an R&D perspective, diversifying the portfolio and really kind of following a similar model, the bones cap, which we've been successful with so far.

Kind of the last minute left, but any closing comments, Mark, on your end?

No, I really appreciate you having us here. I guess, really excited about the opportunity that we do have, as we talked about in the beginning, we really have 2 products that we brought in from Smith & Nephew, but combined it to really encourage people to think about Bioventus as a very diversified company with a lot of opportunity in front of us and really comes down for us for the next 18 months of really executing and taking these assets that we think there's a lot of potential with huge TAMs and really bringing that to market and being successful.

Great. We'll leave it there with Mark and Dave, thanks for joining us today. Really appreciate the time. Thanks.

Thank you.

Thanks, everyone.