Bioventus Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Accelerating Revenue Growth: Fourth consecutive quarter of double-digit organic revenue growth. Raised full-year revenue guidance. Surgical Solutions (ultrasonics and bone graft substitutes) growing, HA business (Durolane) with double-digit growth, Exogen transitioning to growth.
• Boosting Profitability: Adjusted EBITDA $24 million, up $2 million year-over-year. Nearly 150 basis points margin improvement for the year. Committed to 100 basis points annual margin expansion by capitalizing on revenue acceleration, supply chain improvements, and operational expenditure reallocation.
• Improving Liquidity Position: Positive cash flow from operations in Q3, increased cash position, reduced net leverage ratio to ~3.5 turns. Expect cash flow acceleration in 2025 with reduced one-time costs, inventory, and interest expense.

Segment Performance

• Surgical Solutions: Achieved 18% revenue growth in Q3 with double-digit growth in ultrasonics and bone graft substitutes. Ultrasonics saw strong year-over-year growth in generators and disposable blades, focusing on spine surgery with plans to expand to neurosurgery and general surgery. Revenue contribution from surgical solutions is part of the overall double-digit organic growth.
• HA Business for knee osteoarthritis: Delivered double-digit growth in Q3 led by Durolane, with focus on enhancing commercial execution with large IDN and regional customers. Contributes to above-market growth with clinical differentiation and geographic expansion.
• Exogen: Transitioned to a growth business, expected to grow low to mid single digits annually with investments in commercial resources, medical education, and product enhancements.
• Advanced Rehabilitation Business Divestiture: Agreed to sell the business for $25 million with potential earn-outs up to $20 million, expected to close near end of 2024 or early 2025, aiming to strengthen core portfolio and enhance liquidity.

Guidance

• Raised full-year net sales guidance to $562 million to $567 million (midpoint up $2.5 million from prior guidance).
• Adjusted earnings per share guidance raised to $0.40 to $0.42.
• Adjusted EBITDA guidance unchanged at $104 million to $107 million.
• Q4 growth expected to be lower due to unfavorable year-over-year comparisons and slower BGS growth from temporary supply chain onboarding delays.

Risks

• Unfavorable year-over-year comparisons in Q4, particularly with Exogen's one-time favorability in prior year and slower BGS growth due to supply chain actions.
• Potential impact from increased competition in the HA market, though Bioventus believes its clinical differentiation, sales force, and payer contracts provide a strong position.

Question and Answer

Q: Good morning. Thanks for taking the questions and congrats on a strong Q3 here. I just wanted to start on 2024 guidance. Though it implies a 7% kind of growth rate for the overall business in Q4 doesn't kind of flow through that beat in Q3 on either revenue or EBITDA. Kind of a little bit more color on how we should think about this. Is there seasonality in the business that we kind of hadn't thought about? Or anything in the business you would call out kind of outside of that kind of surgical headwind that you called out in your prepared remarks in Q4?

A: Hi, Chase. This is Rob. I'll start and I invite Mark to chime in. Thanks for the question. We'll see lower growth in Q4 driven mainly by two factors. First is unfavorable comps from a year ago, especially with Exogen where we had some one-time favorability and Q4 with significant collections for that business. And then second, then you alluded to this but slower BGS growth because we slowed our onboarding of new distributor agents several weeks ago when we had supply changes. And we're seeing a temporary lag effect in ramping them back up. But that said, we feel very good about our continued momentum across the business in Q4 and in line with our guidance, we're looking forward to driving approximately 13% top line growth for the year, 1.5x that on the bottom line and 150 basis point margin improvement for the year. So Mark, anything to add?

Q: And then maybe just one more on kind of Q4 when it comes to pain, you had said kind of low double digits and surgical back of the napkin mask that implies kind of either low double digit, high single digit in pain. How should we think about this? Are we going to start to see some price benefit in Q4? And then is this just kind of tougher comps from Q4 pain last year? Just kind of how should we think about the pain business in Q4, particularly when you have one of your leading competitors out there kind of calling out some headwinds in the market?

A: Yes, we feel good about our pain business continuing the momentum in Q4. If you look at really focused on driving volume growth, we look at our Q3 results. We had a little bit of a price tailwind not significant, where we expect those dynamics to continue in the Q4. We feel good about the position we have with our contracts, the differentiation we have in Durolane. And as the market continues to move towards the single injection, we feel very well positioned against our competition that's in the market and don't really see any significant changes in Q4 versus our performance year to date.

Q: And then just kind of last for me. If we think about -- start to think about 2025 taking this growth rate from Q4, how are you guys thinking about 2025 too early of a question here, but on a top line basis you've given some color on EBITDA as far as margin expansion. Any color you're willing to give us kind of how you're thinking about 2025 as you enter the year from what it implies in Q4?

A: And Chase, I'll start and again invite Mark to chime in, but we won't be giving 2025 guidance at this time of course. But overall, I'd say, we feel like we're just getting started with the business. In 2025, we have multiple growth drivers and while the comps will get harder, that's what we expected and we also expect to continue our positive momentum into next year. So again I'll keep at high level, but consistent with what we've said before. We expect to drive double digit growth in ultrasonics. BGS may slow slightly compared to the double digits that we've seen this year until we onboard new distributors. With HA again consistent with what we've said. We expect to continue above market growth in HA, and Exogen low to mid single digit growth as I've mentioned. So that combination with our peer-leading gross margin and really a disciplined allocation of resources across our business that strong revenue growth converts as you mentioned there, it converts to EBITDA expansion, which is why we're reaffirming our intention to deliver above 100 basis points in EBITDA improvement again next year and in the years ahead. And then on top of all of that we'll see a very nice improvement in cash flow due to several factors including our improved working capital. So that's a very exciting combination for us and we're looking forward to 2025 and beyond.

Q: The next question comes from Robbie Marcus of J.P. Morgan. Please go ahead. Oh, great. Thanks for taking the questions and congrats on a nice 3Q. Maybe first one, just to follow up, you talked about some of the [indiscernible] transitory issues in fourth quarter. How should we think about that bleeding into the beginning of 2025? And will this cause any sort of first half or second half type of growth disparity in 2025?

A: Hi, Robby. This is Rob. I'll start and turn it over to Mark. Yes. So we feel really good about our momentum into Q4 and into 2025 as well in terms of any of the factors that I mentioned for Q4 that could carry into 2025. Really the only one is from a BGS standpoint, making sure that we -- as I mentioned, we have temporary lag effect and need to ramp that back up as we go into next year. So the start may be a little bit softer, but besides that feel, feel very good across the business about our momentum heading into next year. Mark, anything to add there?

A: Nothing to add.

Q: So is this something we should expect in BGS? It's resolved by 2Q or could it go on longer than that?

A: You can expect it to resolve by Q2.

Q: Okay. And then maybe as a follow up you talked about in the prepared remarks getting net leverage down to 3x by the end of 2025. Maybe just remind us of any upcoming debt payments or milestones and the pathway to getting to 3x in the ultimate target leverage. Thanks a lot.

A: Yes, I think. Thanks, Robbie. Just from an overall leverage perspective, really just continued execution in the business. We talked about the cash flow acceleration that we expect in 2025, I mean, continuing to grow EBITDA. We're going to pay down the revolver in 4Q and the acceleration and things that we've seen in 2023 is good. We have a quarterly amortization and debt repayment with our overachievement on EBITDA. So really just continued execution on driving our business in 2025, as kind of Rob talked about earlier, and seeing interest come down, seeing the debt come down as we repay some of that and just look to flow that through with our strong EBITDA performance and back to the expanding our margin by 100 basis points.

Q: The next question comes from Caitlin Cronin from Canaccord Genuity. Please go ahead. Great. Thanks for taking my questions and congrats on the quarter. So for pain treatments, it seems like you guys are really taking share. Any concerns over your competitor that Chase mentioned earlier? Really refocusing on its HA business with other divestitures and it's also noting that its distribution partner in the U.S. will work to establish stronger market access and work to stabilize sales in the U.S. OA pain products for that company. So any concerns there over renewed focus by them?

A: Hi, Caitlin. It's Rob. Let me start. You were a little bit muffled there at the end, but I think it was about given what we're hearing externally in the HA category from competitors, is there any concerns on our side? And so I'll start. Let me know if I answer your question fully. But -- there's no concerns. I mean what you're hearing externally is a reflection of what we conveyed to all of you throughout this year. I mean, we have very strong clinical differentiation. We've dedicated -- the largest dedicated sales force, we have strong payer contracts and that is a very strong combination. And we're also focused on and seeing traction with improving our commercial execution with larger accounts. So all of that's consistent with what we've shared with you. And as a result of that combination, we've been driving significant volume gains and we've always expected that the pressure from competitors will increase in the coming years. That's what happens when you're leading. So even though the comps get harder, we feel good about our ability to continue to grow above market given our strength and our momentum.

Q: Got it. No, that's helpful. And then just thoughts on the other ultrasonic bone cutting tools in the market that were recently launched and how ultrasonics really compares. And any more color on the innovation you noted coming to this product line?

A: Yes, I'll start. It's -- overall in that category we're early in the going here and that's what's so exciting about it. We have world-class technology and tremendous momentum with the business, but we're just scratching the surface and plenty of opportunity for us to expand organically and that includes through additional innovation in the space. I won't go into detail on what that is, but it's one of the hidden gems with Bioventus is that we have a very strong R&D team for this business and for the most part they've been -- haven't been leveraged over the last couple of years. So that's one of the areas we'll be investing more in the business is from an R&D standpoint. So we'll be sure to update you on some of that innovation when the time comes.

Q: Got it. Awesome. And then just any expectations for the OUS business going forward into next year?

A: Yes, I feel really good about it. I've mentioned a couple of times that I think we have tremendous potential for the international business. There's probably more foundational work that's required than I realized when I first joined the company. But that said, I'm familiar with scaling international businesses and I remain very optimistic about the growth potential of our international business in the years ahead. So we'll be talking about that again throughout 2025 as we build and scale that business and make it a more significant contributor to the overall Bioventus growth profile.