Bioventus Inc. (NASDAQ:BVS) Q3 2023 Earnings Call Transcript November 12, 2023
Operator: Thank you for standing by. My name is Dustin, and I will be your conference operator today. This time, I would like to welcome everyone to Bioventus Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] At this time, I’d like to turn the call over to Mr. Dave Crawford, Vice President of Investor Relations. Sir, you may begin your conference.
Dave Crawford: Thanks, Dustin, and good morning, everyone, and thanks for joining us. It’s my pleasure to welcome you to the Bioventus 2023 third quarter earnings conference call. With me this morning are Tony Bihl, CEO; and Mark Singleton, Senior Vice President and CFO. Tony will begin his remarks with an update on our business and outlook for the remainder of the year, followed by a review of the quarter. Mark will offer further detail on our third quarter results and discuss the update to our 2023 financial guidance. We will finish the call with a Q&A. A 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 contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company’s filings with the SEC, including Item 1A Risk Factors of the company’s Form 10-K for the year ended December 31, 2022, as well as subsequent Forms 10-Q and other company’s filings made with the SEC.
You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although it may voluntarily do so from time-to-time, the company undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. This call will also include references to certain financial measures that are not calculated in accordance with U.S. generally accepted accounting principles or GAAP. We generally refer to these non-GAAP or adjusted financial measures. Important disclosures about and definitions and reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website at bioventus.com.
And now I’ll turn the call over to Tony.
Tony Bihl: Thanks Dave, and good morning, everyone, and thank you for your continued interest in Bioventus. Let me begin by saying that I am again encouraged by the strength of our results for the quarter, as we delivered earnings ahead of our expectations for a third consecutive quarter, raised our annual financial guidance. The highlight for us was a return to growth for our HA business, one quarter ahead of schedule. Our resilient employees have worked diligently to address last year’s challenges and have made measurable progress in improving our execution, delivering on our commitments, enhancing our business controls and processes. Before discussing the quarter’s performance, I want to take a moment to reflect on the recent progress made to solidify our financial metrics, we believe successfully delivering on our financial plan this year will position us to deliver future improvement in revenue growth, profitability and predictability.
As I mentioned in the past, we will not reverse last year’s headwinds and fully rebuild our balance sheet, earn back stakeholders trust and regain credibility with our investors with a couple of quarters of strong performance. With that said, I believe we have achieved substantial progress to solidify our financial position and maximize the long-term opportunities for Bioventus as we begin to gradually increase our attention to future growth drivers. During the quarter, we demonstrated several positive indicators of our future success, including one, the continued financial discipline to reduce spending and enhance operating margin. Two, as I mentioned earlier, we saw a return to growth for our HA business, including continued double-digit unit volume gains; and three, we achieved double-digit growth across key long-term revenue drivers in our ultrasonics business and across our International segment.
As we begin planning for next year, we remain focused on investing and prioritizing areas of our business where we believe we can deliver sustainable, profitable growth. We believe the steps we are taking will result in enhanced growth and increased visibility to our key business drivers. While less visible, we’ve begun to show signs of improvement in stabilizing our organization. My leadership team and I are encouraged by the results of our recent employee engagement survey as we look to continue to strengthen our culture. From a headline perspective, we saw an improvement in our employee engagement scores, which is important given the challenges we placed on our teams over the past 2 years, has a positive sign of engagement. 85% of our employees participated in the survey, well above industry benchmarks.
And they provided over 1,400 comments. We’re committed to work together, create a culture that is inclusive, engaged and empowered as we deliver on our promises to our customers, employees, shareholders and the communities where we operate. Our impressive performance so far this year has reinforced my confidence in our ability to reduce leverage and to enhance our revenue and earnings growth opportunities as we maintain focus on cost control. We participate in large growing markets and provide innovative differentiated products for our patients across each segment of our business. Bioventus is either a market leader or a growth leader. Now let me turn to the third quarter results. For the quarter revenue was $121 million, declined 6% compared to the same period a year ago; however, when considering the impact of our wound business divestiture, growth was even compared to the prior year.
More importantly, our adjusted EBITDA of $22 million was above our expectations, due in part to stringent control of our expenses and the significant improvement in our accounts receivable collections over the course of the year, which enabled us to have a favorable adjustment to our bad debt reserves. Year-to-date, adjusted EBITDA has increased more than $15 million, representing a 30% increase. Across pain treatments, as I highlighted earlier, we saw significant double-digit gain in volume for DUROLANE as we continue to take market share with our clinically differentiated offering. Overall, volumes were also higher for GELSYN and SUPARTZ. While we continue to be impacted by the decline in our average selling price for DUROLANE and GELSYN, that headwind has steadily declined on a sequential basis.
As we mentioned previously, we expected the average selling price for DUROLANE to increase sequentially in the fourth quarter. CMS published pricing for DUROLANE in mid-September, and it showed the ASP for DUROLANE was increasing for the fourth quarter as we predicted. However, we do anticipate a temporary sequential decline in pricing for DUROLANE in the first quarter 2024. After the first quarter, we expect to see CMS pricing rising sequentially for the rest of the year. Due to a higher percentage of contracted volume for GELSYN, the average selling price has continued to decline sequentially. We continue to expect that by mid-2024, we will see ASP for GELSYN begin to rise sequentially as well. While the move to ASP combined with higher-than-anticipated prior – private payer contracted volumes presented meaningful headwinds to our HA business.
We are now returning our overall HA portfolio to growth. We believe market growth, combined with an increase in market share and improving pricing dynamics will enable mid-single to high single-digit growth in the coming year. Now turning to Surgical Solutions. In the third quarter, our ultrasonics portfolio grew at its highest double-digit rate of the year, and we expect the momentum to continue into next year. We believe our leading technology and small market share provide a strong backdrop for continued market penetration and growth across ultrasonics. Limiting the overall growth for Surgical Solutions was a slower-than-anticipated recovery in our bone graft substitute business. And we’ve brought up on a sequential number of new distributors and accounts, the ramp-up in sales volume trailed our expectations.
Beginning in the fourth quarter, we’ve implemented structural change to our surgical solutions selling effort, which we believe will improve growth and eliminate potential channel overlap. Our direct sales team will now focus on ultrasonics as primary target, and our distributors will focus on bone graft substitutes as their primary target. We believe this increased attention will help limit any further distributor churn in bone graft substitutes, while driving improved efficiency in our recent account conversions. Within Restorative Therapies, organic revenue declined double digits when removing the impact of our wound business divestiture. Revenue growth in advanced rehabilitation was impacted by accelerated placements of vector weight-bearing systems in the second quarter.
EXOGEN revenue fell slightly compared to prior year, but revenue increased sequentially in the U.S. and reflect the improving trends we’re experiencing across the business as we continue to reengage with physicians after our sales force realignment last year. Finally, our International segment grew 18% with constant currency growth of 16%. Growth was driven by strength across our Surgical Solutions business. While international growth is expected to temporarily slow in the fourth quarter due to challenging comparisons to prior year period, we anticipate maintaining double-digit growth for our International segment in 2024. Finally, I’m pleased with our ability to address last year’s headwinds and achieve meaningful improvement in our financial results and liquidity.
We’ve improved the predictability of our HA business and demonstrated the ability to manage through complex changes. While more work remains, our result is steadfast in executing our business plan and prioritizing those areas we believe are most meaningful in driving increased profitability, improving our balance sheet and enhancing our operational efficiencies and internal controls as we work to restore your confidence in Bioventus. Now I’ll turn the call over to Mark.
Mark Singleton: Thanks, Tony, and good morning, everyone. Let me start by saying that I’m delighted with the sizable improvement in our leverage so far this year as well as the reduction in our cost structure and improvements in our internal control environment. Throughout the entire organization, our team have executed well against our financial objectives. In addition, the predictability of our business has significantly improved, enabling us to have confidence in raising our financial guidance and increased visibility as we planned for 2024. Now turning to our results for the third quarter. Revenue was $121 million, which was a 6% lower compared to the prior year. Adjusting for the divestiture of our wound business, revenue growth was even when compared to the prior year.
In addition, adjusted EBITDA of $22 million was also even compared to prior year adjusted EBITDA from continuing operations. Lower operating expenses from our focus on reducing spending and benefits from our restructuring initiated at the start of the year were offset from lower gross profit due to the reduction in revenue. Across pain treatments, revenue returned to growth as sales increased 3% compared to the prior year as we continued our strong double-digit volume growth across DUROLANE, which more than offset the continued pricing pressure due to the move from WAC to ASP. As a result of its continued momentum and significant share gain from its clinical differentiation, DUROLANE now makes up nearly two-thirds of our HA revenue. Meanwhile, we previewed, last quarter, volume increased for GELSYN compared to last year, although overall revenue was down slightly as pricing headwinds similar to DUROLANE remained.
As we look to close out the year, we expect to see growth across our HA platform continue to accelerate for the fourth quarter. In Surgical Solutions, we grew 7%. ultrasonics maintained strong double-digit growth but slower-than-expected recovery in bone graft substitutes impacted overall growth. We expect fourth quarter growth to be below trend given the slight delay in the acceleration of our bone graft substitute franchise that Tony mentioned. Overall, we remain excited about the continued momentum in ultrasonics and long-term prospects for it to be a major driver of our future revenue growth. Finally, Restorative Therapy sales fell 28% in part by the impact of our wound business divestiture, which accounted for 15 percentage points of the decline.
On an organic basis, Restorative Therapies declined 13 percentage points driven by significant reductions in our advanced rehabilitation business. This reduction was partially due to the impact of accelerated sales in the second quarter due to customer demand that we highlighted on our previous earnings call. In addition, prior year revenue was higher than normal due to the recovery from earlier in the year supply chain disruptions. We anticipate a return to growth for advanced rehabilitation in the fourth quarter. Sales for EXOGEN for the quarter were down low single digits as we continue to see improved stabilization as revenue in the U.S. for EXOGEN continued to grow sequentially. Moving down the income statement. Adjusted gross margin of 75% increased 30 basis points compared to the prior year.
Overall, adjusted total operating expenses were almost $9 million compared to the prior year. The reduction in expense resulted from benefits of our restructuring and wound business divestiture, combined with spending discipline across general and administrative expenses. The decline in overall operating expenses was minimized by a significant reduction in our accrual for management incentives for the prior year. Now turning to our bottom line financial metrics. Adjusted EBITDA of $22 million was even with the $22 million for continuing operations earned in the prior year. Adjusted operating income increased to $20 million from $17 million in the prior year, while adjusted net income totaled $5 million compared to $11 million a year ago. Adjusted earnings per share were $0.05 for the quarter compared to $0.18 in the prior year.
Now turning to the balance sheet and cash flow statement. We ended the quarter with $27 million of cash on hand and $395 million of debt outstanding. We had $15 million drawn on our revolving credit facility at the end of the third quarter. Operating cash flow represented an outflow of $8 million for the quarter due to a negotiated delay in payment of rebate claims to private payers since the first quarter. These medical rebate payments were the last calculated under WAC pricing with higher rebate rates and will come down going forward. We forecast to return to positive operating cash flow in the fourth quarter as working capital normalizes. From a liquidity perspective, our adjusted EBITDA for the year remains ahead of our expectations, and we are well within the compliance with our leverage and interest coverage covenants at the end of the third quarter.
Finally, let me review our 2023 guidance, which has been updated to reflect the performance of our business in the third quarter and our fourth quarter expectations. We now expect 2023 revenue to be $498 million to $505 million, an increase in the midpoint from our previous guidance of $490 million to $505 million. Our guidance for adjusted EBITDA is now expected to be $84 million to $87 million, an increase from our previous guidance of $75 million to $80 million. Finally, our guidance for adjusted earnings per share is now expected to be a loss of $0.12 to a loss of $0.09, an improvement from our previous guidance of a loss of $0.24 to a loss of $0.20. In closing, the execution of our business plan for three straight quarters, and it has enhanced our liquidity position.
And with our improved processes and controls, our visibility into the business has increased, leading to what we believe will be improved predictability. As we close out the year, we plan to remain steadfast in improving our financial performance through increased revenue and disciplined expense management. Operator, please open the line for questions.
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