Bioventus Inc. (BVS) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Very happy to introduce our next speaker, CEO of Bioventus, Rob Claypoole. Rob will do a presentation followed by some Q&A.

All right. Thank you for the introduction, Robbie, and good morning, everybody. Really nice to see you and appreciate you joining us today. So at Bioventus, we're on a mission to help patients recover and live life to the fullest. For those of you who don't know, I joined the company 1 year ago, and I did that because I could see that the potential of the business was enormous. And I hope to convey to you today during my presentation, why I'm even more excited and more confident today than I was a year ago about our ability to drive shareholder value creation. So, before I do that though, the one slide that all of you are already familiar with in my deck during the presentation today, I'll be making some forward-looking statements. And I'll also be discussing some non-GAAP metrics for more information on those as well as other risk factors associated with Bioventus. Please see our latest 10-K, 10-Q that are filed with the SEC and also available on our website. All right. So with that behind us, let me give you a brief overview of Bioventus. We have 3 main businesses; pain treatments, surgical solutions, and restorative therapies. A quick note on restorative therapies before I go further. Over the past few years, we've made significant steps to streamline this portfolio. This included the decision last year in 2024 to divest our advanced rehabilitation business. And this is all part of our effort to continue to sharpen our focus on growth and profitability. And the reason why I mentioned that is because that divestiture successfully closed at the very end of last year. And after that divestiture, Bioventus still generates over $500 million in annual revenue. And when you look across the product categories that we're in, it represents about a $6 billion market opportunity. Now one of the many key strengths of Bioventus is that we have multiple paths to creating significant shareholder value. First, over the past few years, we've assembled a diverse portfolio that allows us to drive both short- and long-term growth and we'll talk a lot more about that in a minute. Those -- the categories that we're in are also large and growing markets. And in each one of those spaces, we're either a market leader or a growth leader. In addition to that, what we've shown is that we have the ability with that portfolio to significantly accelerate our revenue. And we have a very healthy peer-leading gross margin that's in the mid-70s. And when you take that very healthy gross margin and you combine it with accelerated revenue growth and also add the opportunity that we have to drive cost efficiencies going forward, well, it creates an excellent platform for us to continue to expand our margins while improving our profitability and our cash flow. And we saw the power of this combination in 2024 as we doubled our share price. But I can't emphasize enough that this is just the beginning of what we can achieve at Bioventus as we strive to become a $1 billion high-growth, high-margin, high-cash-flow company. Let's take a closer look at the numbers. When I joined Bioventus, I said that there were 3 priorities that we're driving. We're going to accelerate revenue. We're going to expand margins, and we're also going to reduce our debt. And we've made significant progress with each one of those. This is through our improved execution and financial discipline. First, as it relates to revenue, I'm very happy to say that we have brought growth back to Bioventus. While we haven't released our full 2024 results, if you look at the midpoint of our guidance, it's just over 13%, and that compares to about 3.5% growth the prior year. And we believe that the stage is set for sustainable growth going forward. Next priority was improving our profitability. And again, when you take that very healthy gross margin in the mid-70s and you combine it with the accelerated revenue growth, well, of course, that generates nice EBITDA growth. And our EBITDA is projected to exceed $100 million for 2024. And that represents about a 20% growth rate with our EBITDA. And then when you take the two of those combined, well, it also creates a very healthy leveraged P&L as our EBITDA growth is expected to exceed our revenue growth by about 50%. So now as we look at the lower half of the slide with cash flow and our leverage, this is an area where Bioventus was challenged in the past, but we've also made significant progress here. In fact, if you look over the past 18 months, we've paid down a significant amount of our debt. And I'd like to share with all of you today that in the fourth quarter alone for 2024, we'll show a debt reduction of nearly $50 million. So we're very excited about our progress there, and we expect an even bigger step change going forward and also why our net leverage, we expect it to drop below 3 well before the end of 2025. So overall, we're encouraged by our progress with our improvement, with our execution and our financial discipline. But again, I can't emphasize enough that this is just the beginning of our journey. We feel like we're just trotting up to the starting line as we strive to become that $1 billion high-growth, high-margin, high-cash-flow company. Now at Bioventus, we're really focused on that top line growth. And when we analyze that growth, we look at it through a slightly different lens. So as I mentioned before, we've assembled this incredible portfolio, a diverse portfolio of both short- and long-term drivers. And we categorize our growth into 3 buckets. We look at our high-growth drivers, our market leaders and our emerging growth engines. So what I'll do is I'll give you a brief overview of those on this slide, and then we'll go into more detail. First, for the highest growth drivers. So here, we're talking about ultrasonics and bone graft substitutes. And as you can see on the right-hand side of the slide, the end market growth is in the mid-single digits. We're driving very strong double-digit growth, and we expect that trend to continue through aggressive market development with our ultrasonics technology as well as we continue to take share with bone graft substitutes. The next are our market leaders. Now these are the products that our company was founded on nearly 2 decades ago, and it's where we have a strong market leadership. And today, they still make up about 2/3 of our revenue. We'll take them individually, first, hyaluronic acid for knee osteoarthritis. We've demonstrated our ability to drive very strong double-digit growth here, and we expect that to continue based on our clinical differentiation for -- the above market growth to continue as we leverage our clinical differentiation and also our improved commercial execution. The next is with Exogen. We'll go into more detail on this, but this is a business that until recently was declining for Bioventus. Now we've completely turned the business around, and we're looking at low single-digit to mid-single-digit growth going forward. All right. Now let's take the emerging growth engine. For this, we're talking about peripheral nerve stimulation. As an exciting space, it's a small contributor to Bioventus today, but we expect this to turn into a major growth driver for the company, starting with our TalisMann technology that's waiting FDA approval as well as the other innovation that we have in the pipeline. So let's go into each one of these in a bit more detail. First, with our Ultrasonics technology. It's about a $1 billion market. Today, we're focused mostly on spinal surgery for bone cutting. And that's a market where it's dominated mostly by traditional drills and hand instruments. We're driving very strong double-digit growth, and that's because of our value proposition. First, our technology provides surgeons with exceptional precision and control during surgery. Second, it provides a surgeon with substantial time savings. And for this, we're not talking about it saves 2 minutes per case. And if you add up those minutes across the course of the year, it means something. One surgeon recently told me that it's saving him 45 minutes in every case. And what that means, of course, is that it drives much higher operating room productivity for a hospital. In addition to this, our technology helps reduce blood loss during the procedure, which improves patient results. And also what we hear often from surgeons is that it's much easier on their hands. One surgeon that I was with recently in Texas said, it's so much gentler on his hands that it's allowing him to extend his career. But perhaps the comment that I like the most that was actually while I was with Mark, our CFO, we were visiting a surgeon, and he said "guys, your technology is truly revolutionary. And that type of change doesn't come along very often". Well, we agree, and that's why we're going to invest in and drive this business aggressively over the coming years by broadening our marketing, increasing and improving our commercial execution, expanding internationally. And also, we have the opportunity to expand into general and neurosurgery by leveraging the same generator that you see on the left-hand side with different disposables for tumor removal. Let's go to our next growth generator, which is bone graft substitute. So we target just the premium segment within the bone graft substitutes. This is another $1 billion market. Again, we're focused on spinal surgery here. And we've been driving very strong double-digit growth with our OSTEOAMP product. And that's for a few different reasons, both clinically and economically. Our product provides similar results as the market leader across a large number of procedures, but with potential material savings to the hospital. So again, we have both a clinical and a health economic value proposition in this space. Going forward, we expect to continue to drive very strong growth. And first and foremost, that's by raising awareness of that value proposition that we have while also expanding internationally. Now let's move to our market leaders, and we'll start off with HA, hyaluronic acid to help patients who are suffering from pain associated with knee osteoarthritis. It's a big market. We're driving very strong growth 3x the market nearly in 2024, and that's led by our single injection therapy, DUROLANE. And that's for a few different reasons. The first reason is because of our clinical differentiation with our DUROLANE therapy. The second is that we have the largest dedicated sales force in this space. This is really important. When our HA team gets up each day, they're focused on selling HA. They're not distracted by 5 other products that are in their bag. And another one I'll touch on is that we have a very strong and stable payer -- private payer contract base, and that gives us broad access to the market. So going forward, we expect to continue to drive above-market growth. And that's not only for the reasons that I just mentioned, but it's also because we have a very disciplined expansion plan for this business to continue to raise awareness about our clinical differentiation and also to target large untapped revenue pools that we had ahead of us. We also have the opportunity to expand internationally with this business. And given the overall health of this business and Bioventus, we're in a great position to start exploring potential portfolio expansion opportunities. Now I'll go to our other market leader, Exogen. So for those of you who aren't familiar with it, this is bone stimulation for patients who suffer from nonunion fractures. As I touched on before, until recently, this was a business that had been deprioritized by Bioventus. In fact, if you go back in time, this was a business that was well over $100 million in sales. And if you look at the end of 2023, it was about $70 million. So it's a business that had been declining for multiple years. Team completely turned that around in 2024, and it was through 3 basic steps. First, we drove renewed focus on this business at all levels of the company. And the second is we took basic steps to improve our fundamentals and execution both in the back office and commercially. And third, we made a series of investments in 2024, a series of small investments that have had a very quick ROI, invest in an area, see if it works, when it works, invest more, and that's been quite successful for us. And so now we're seeing low single digit to mid-single-digit growth, and we're going to aim to achieve the higher end of that moving forward by continuing our renewed focus on the business and also continuing to improve the fundamentals and execution that we have both in the back office and commercially. All right. Now we'll talk about the emerging growth engine, which again is peripheral nerve stimulation. Now this is for patients who are suffering excruciating chronic peripheral pain. It's a very exciting space for everybody. We're going to be focused on knees, shoulders and lower legs. And we intend to turn this into a major growth driver for Bioventus. It starts with our TalisMann technology. So what this does is generate significantly more energy to target deeper and thicker nerves. While still being the smallest wearable on the market, it will be complemented by a technology called STEM trial. STEM trial helps identify patients that are best eligible for a permanent PNS solution, and that's a requirement by many insurance providers. So both of those products right now are awaiting FDA approval. We expect to launch them in the second half of this year. And I can't wait. It's a very exciting path forward for us. We have a lot of work to do. We're going to continue to build out our marketing in this space. We're going to significantly expand our sales presence. And we're also going to continue to work and drive the innovation that we have in our pipeline beyond TalisMann and STEM trial. So we expect going forward that this will become a transformational long-term growth driver for Bioventus. All right. So you can see from that, that, again, over the past few years, Bioventus, we've assembled a portfolio that gives us the opportunity to drive both short-term and long-term growth. And we're really excited about that because we're hyper focused on growth. But as you know, driving top line growth is not the only way to create shareholder value. As I mentioned before, we have a peer leading, very stable gross margin in the mid 70s. And when you combine that with our above-market growth, what it means is that now we're in control of our P&L. And it also means that now we have the flexibility to consistently invest in a disciplined manner in our future growth while continuing to expand margins. And I want to emphasize it again, because we're in control of our P&L, we have the ability to consistently invest in a disciplined manner to drive our future growth while still expanding margins. And that's exactly what we're going to do. We've communicated that we intend to increase our EBITDA margin by 100 basis points annually by dropping our gross profit to the bottom line and also by driving those operational efficiencies that I referred to earlier. All right. So before I start to wrap up, let me touch on one more area that -- it might be less understood and appreciated but that we are equally excited about in terms of driving shareholder value. And that's enhancing our cash flow and liquidity. So we've made meaningful progress over the past few years with our cash flow and negative free cash flow in 2022, positive free cash flow in 2024 but we expect an even more significant step change with it in 2025 and going forward. And it's for the 4 reasons that you see on the left-hand side of the slide. So first, we expect our EBITDA to continue to increase as we drive that top line growth. Second, we've paid down a substantial amount of our debt. And as we have a lower interest rate on our term loan, obviously, the two of those combined drive lower interest expense. We also expect a significant decrease in our onetime cash costs, and we continue to make improvements with our working capital. This year, we'll be attacking our inventory. So what does all of this mean? In 2025, we expect our free cash flow to double compared to 2024. We also expect our free -- our cash flow yield to exceed 60%. And as referenced before, we expect our net leverage to drop below 3 well before the end of 2025. So overall, really excited about the progress that we've made so far, both in terms of accelerating revenue on the top line, improving our profitability. And in this area, improving our cash flow and liquidity with an even bigger step change ahead of us. All right. So I'll wrap up on this slide. 2024 was a transformational year for Bioventus. And we're really encouraged by our improved execution and our financial discipline. But again, I can't emphasize enough that this is just the start to what Bioventus can achieve. We're really excited to build on our momentum. And I referenced that for 2025, growing above market, expanding our margins by 100 basis points, our EBITDA margin by 100 basis points, doubling our free cash flow. That combination, that's a rare combination for a small cap company, and we're excited about doing all of those at the same time as we continue to march towards becoming a $1 billion high-growth, high-margin, high-cash-flow company as we help patients recover and live life to the fullest. And so thank you very much for your time and your interest in Bioventus. And with that, we'll turn it over to the questions. I should have mentioned and Mark, our CFO, will also join me up here.

Well, great. Rob, you've been in the CEO seat for a year now, plus or minus. And you've had great 2024 with a lot of positive trends. You turned around BGS, HA reimbursement has now lapped and stabilized, and we've seen growth in that business. So maybe if you look back over the past year and you look forward to 2025, where are you and where you want to take the business? How much of the hard work has been done? And then what are your goals for 2025?

Yes. Thanks, Robbie. So we often talk about internally that while 2024 was a great year, both with improving our execution and our financial discipline, we really feel like we've just started -- trotted up to the start line, and that 2025 is when we really begin the race. And so I'd say we're still early in the process because we have so much potential ahead of us. And so the big focus will be the areas that I touched on today, which is driving that above-market growth driving that margin enhancement and then doubling our cash flow. So -- but it doesn't stop with 2025. I mean because of that portfolio that we've assembled and the mechanics of our business, feel like we have a really long road ahead of us, a path, exciting path ahead of us to drive shareholder value through all 3 of those areas.

I think it's worthwhile rehashing what you actually did when you stepped in because bone growth simulation, I mean, that growth has not just stabilized but improved meaningfully, the HA business has done really well. So maybe you could just walk through some of the actual changes you made, whether it was personnel or reimbursement changes or whatever and how you were able to take a business that wasn't outperforming to outperforming?

Yes. So well, thank you, first, for the comment. So first, Bioventus went through some challenges in the past. And those challenges masked amazing ingredients that the company has to driving shareholder value going forward. That's really important in terms of the past. When I joined the organization, first thing was just to make it very clear what is our strategy to driving growth and profitability going forward because of the company and what the company had gone through that pathway wasn't clear. So it was just looking at what is the best way to grow this company profitably going forward and then making sure that everybody across the organization was clear on that plan. Some of this gets down to boring fundamentals, which is making sure that at every level across the company, they know what our strategy is, what our priorities are for the year? What are the critical activities under that? What are the leading and lagging metrics for every priority that we have? It works, making sure that everybody is clear on that. In addition to that, we have made some personnel changes at different -- across the company and at different levels. And that's just -- we want to continue to invest in our existing talent but also to upgrade our talent to drive -- to really leverage the growth opportunity that we have ahead of us. And in some cases, that's bringing people who have already done this before in other organizations and know what good looks like. The other area I'd just point out and then offer it to Mark to chime in, but in the different areas, and this applies to BGS that you mentioned, but also other areas of the company. We have a really keen focus on driving focus and accountability. And so when we look at what we're doing in terms of the leadership structure, where the sales force is focused, what customers the sales force is going to and I could keep going on from there, focus is key instead of getting distracted. We have so much opportunity ahead of us that we can be laser-focused on where the biggest opportunity is and still drive exciting growth. And then the accountability behind that, because it's the old saying, if you don't measure it, it doesn't exist. So having this combination, making it part of our DNA, where leading and lagging metrics are what we're looking at as a leadership team every month so that we can see what's working, what's not working, how do we adjust when it's not working? And that holds us accountable so that we can hold the rest -- as an executive leadership team so that we can hold the rest of the organization accountable. Mark, anything to add?

No, I agree with Rob's comments. I'd also comment on what Rob has brought to the company from a commercial execution perspective and you look at the experience that he's had at names like Medtronic, Covidien J&J. He knows what good looks like from a commercially executing and he's really raised the bar within the organization to another level that one has benefited us in '24, but also back to starting to get -- going up to the starting line that I expect to benefit us going forward.

Maybe I could pivot for a minute before we get into some of the products and the financials, we can talk about the capital structure. You had a target for less than 3x net debt second half of 2025. You have some B class shares. You have some debt coming due in the not-too-distant future. Maybe just talk about how the rehab business sale played into that, where you stand and how investors should be thinking about your leverage and your capital structure moving forward.

So maybe I'll touch on the Advanced rehab business, and then Mark can chime in as well on the capital structure moving forward. So first, the decision last year to divest the advanced rehab business, and I mentioned it during my remarks, but it was really to sharpen our focus on growth and profitability. We have -- even after that business divested, we have a very diverse portfolio for a company our size, and we're really excited about the portfolio that we have. But that was the main focus of it. And that's because, again, that business was not accretive from both a growth and a profitability standpoint for Bioventus. So that's strategically why we did it. I'll let Mark comment on what that -- how that impacted our debt.

Yes. And Rob talked about in his presentation that we paid down debt of $50 million in fourth quarter. A big part of that was the advanced rehab sale. So that was $20 million paid down the revolver, another $15 million, we had a milestone come in from our Life net health sales. So close to $50 million of payment, but really that transaction was not about reducing leverage. It was really about focus and narrowing our ability to invest in a smaller number and really take those growth drivers that Rob talked about in his presentation and maximize those over time. To your point on our capital structure overall, that's a priority for us that we will be focused on starting in 2Q and don't really expect to have anything significantly different from what we have today, but we've come a long way in paying down debt and doing what we said we were going to do with the Street. And we feel that we're in a really good position with the banks and look forward to using our track record and our ability to pay down the debt to even lowering our interest rates in the future.

And I believe there was a shelf registration in third quarter or early fourth quarter. Maybe just remind us of the purpose of that.

Really just good housekeeping. That's something that we've been discussing as a management team for a while that going all the way back to when I started in 2022 and felt that, that was the right time to do that to really put that in place as really just good financial discipline and housekeeping to make sure that we have that.

I know you didn't preannounce the quarter or guide, but any qualitative comments about how you felt about fourth quarter and maybe where consensus is for 2025?

Yes. I'll make a broad statement about it. I mean we continue steady progress across all of the areas that I mentioned at Bioventus. And the important thing to note is that we don't have to do something that's particularly creative or spectacular. We have this great portfolio to allow us to drive growth with the right improvements in commercial execution. We have, because of that gross margin, the ability to take advantage of that accelerated growth and drive it, drop the gross profit to the bottom line to improve our margins. And again, as we've mentioned, I said that in the fourth quarter alone, and Mark just mentioned again that we'll show a debt reduction of $50 million. So what that tells you is that we're happy about 2024 overall. And we're really excited about the year ahead. It's -- we have, again, a really exciting pathway ahead of us, not just for '25, but '26, for '27 in terms of driving our progress across all 3 of those areas, which, again, we think that's a pretty rare combination to drive growth, profitability and cash flow all at the same time but we haven't released 2025 guidance yet.

Okay. Maybe we could touch on your peripheral nerve stimulation PNS product. This is a really interesting area that is still in its infancy and reimbursement is still being figured out. Maybe speak to how you feel about the product itself, the reimbursement environment and the launch process and what you're doing there?

Yes, sure. Well, first, for those who aren't familiar with it, it's a very small contributor to Bioventus today in terms of revenue inconsequential today. And we're really excited about what we consider step change technology that we have going through FDA approval right now. So first is our TalisMann technology. I touched on it just briefly, but this is technology that's designed specifically for peripheral nerve stimulation. It's for, again, patients who are suffering from excruciating chronic peripheral pain. It's not a technology that was in a different area of nerve stimulation and then we're taking it and trying to make it work for peripheral nerve stimulation. The key to it is that it generates much more energy. And what that allows the -- allows us to do is to target deeper and thicker nerves. And it also gives more margin for error in terms of the placement of the device. And -- but the remarkable part of it is generating much greater energy, but also being the smallest wearable on the market. So imagine this is what patients have on them at all times. They want something that's very small and discrete. So having small but also very powerful is what makes it very special. But in addition to that, we have a really strong R&D team with our PNS business. It's -- this is, again, part of the portfolio that we've assembled and fortunately, great R&D talent came with it. And so we're also developing other innovation in the pipeline. I mentioned SIM trial, which helps identify patients for the permanent solution. And then we have other technology that we're not going to talk about yet that's in our pipeline in this space. So we are determined to develop the most comprehensive and best portfolio in the PNS space. But Robbie, as you mentioned, this is -- this market is early in its stages. It's -- the growth opportunity is really exciting. Some of the aspects of the market in terms of reimbursement, et cetera, are still to be determined over the long term. But we expect this to turn into a very exciting long-term growth driver for us. We're not looking at this business to make a big difference for us in 2025, 2026. This is a long-term contributor to our growth.