Bioventus Inc

NASDAQ:BVS

Earnings Call Analysis

Bioventus Achieves Strong Growth and Improves Profitability

In the second quarter of 2024, Bioventus reported a 10% increase in revenue to $151 million, with an organic growth of 14%. Adjusted EBITDA rose by 22% to over $34 million, and gross margin improved to 76%. Particularly strong performances were seen in the Surgical Solutions segment, with 16% revenue growth, and the Pain Treatments segment, with a 17% increase. The company expects to achieve double-digit organic growth for the full year and has updated its financial guidance, projecting net sales between $557 million and $567 million, adjusted EBITDA between $104 million and $107 million, and adjusted EPS between $0.36 and $0.42【7:0†source】【7:1†source】【7:9†source】.

Strong Start to 2024

Bioventus kicked off 2024 with impressive momentum, achieving a 14% organic revenue growth, excluding the impact from the divestiture of its Wound Business. This growth was driven by robust performance across its three main business segments, signifying a strong operational execution and strategic alignment.

Highlights of Revenue Performance

The company reported net sales of $151 million for the second quarter, reflecting a 10% increase year-over-year, with Surgical Solutions revenue leading the way with a 16% growth. Pain Treatments also performed well, increasing 17%, highlighting the recognition of Durolane, their single-injection therapy, and the strength of their sales team's execution.

Impact of Strategic Decisions

The divestiture of the lower-margin Wound Business was a strategic choice that positively affected the adjusted gross margin, which climbed to 76%, up 180 basis points year-over-year. This decision is expected to enhance profitability by allowing Bioventus to focus on areas with higher growth potential.

Investment in Future Growth

Bioventus is strategically investing in key areas including R&D, medical education, and commercial execution to fuel longer-term growth. This includes significant efforts to improve product offerings and increase market share, particularly in the ultrasonics and bone graft substitutes sectors that saw robust double-digit growth.

Future Guidance Shows Confidence

Looking ahead, Bioventus expects to maintain double-digit revenue growth in the second half of 2024, projecting net sales between $557 million and $567 million, an increase in guidance reflecting strong operational performance. The anticipated adjusted EBITDA for the year is now between $104 million and $107 million, indicating healthy growth expectations.

Sustainable Profitability Amid Investments

Even with increased investments, Bioventus expects to grow its bottom line faster than its top line, targeting an adjusted EBITDA margin improvement of over 100 basis points from last year. This reflects a disciplined approach to managing operational costs while investing in growth initiatives.

Liquidity Improvement and Debt Management

The company has improved its liquidity position, ending the quarter with $32 million in cash and reducing total debt by $8 million. The net leverage ratio was further reduced, and Bioventus aims to lower this to below 3x before the end of 2025, demonstrating a commitment to financial prudence.

Strategic Divestiture Decision

The decision to divest the Advanced Rehabilitation business is strategic, aimed at allowing Bioventus to focus more intently on its core businesses. This is expected to enhance operational execution and liquidity without materially impacting overall financial metrics.

Market Share Gains and Competitive Position

Bioventus continues to gain market share in its Hyaluronic Acid (HA) business, driven by the strong clinical differentiation of Durolane. The company is well-positioned to capitalize on expanding opportunities both domestically and internationally, fueled by a dedicated commercial team.

Conclusion and Outlook

With all the factors considered, Bioventus stands at a pivotal point. The company's solid execution, strategic decisions, and positive outlook for revenue growth position it favorably for the remainder of 2024 and beyond. Investors can look forward to the company potentially enhancing shareholder value through disciplined investments and operational improvements.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Bioventus Second Quarter 2024 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead.

[David Crawford, executive]

Thanks, Danielle, and good morning, everyone, and thanks for joining us. It is my pleasure to welcome you to the Bioventus 2024 Second Quarter Earnings Conference Call. With me this morning are Rob Claypoole, President and CEO; and Mark Singleton, Senior Vice President and CFO. Rob will begin his remarks with an update on our 2024 priorities and our business, and Mark will provide detail of our second quarter results and discuss our updated 2024 financial guidance. We'll finish the call with Q&A. A presentation for today's call is available on the Investors section of our website, bioventus.com.

But before I begin, I would like to remind everyone that our remarks today contain forward-looking statements that are based on 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 Securities and Exchange Commission, including Items 1A, Risk Factors, of the company's Form 10-K for the year ended December 31, 2023, and such factors may be updated from time to time in the company's other filings made with the Securities and Exchange Commission. 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 the U.S. Generally Accepted Accounting Principles, or GAAP. We refer to these as non-GAAP or adjusted financial measures. Important disclosures about the 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 Rob.

[Robert Claypoole, executive]

Thank you, Dave. Good morning, everyone, and thanks for joining our call today. We're off to an excellent start to 2024 thanks to the efforts of our Bioventus team across all functions and geographies. In the beginning of this year, we established new strategic priorities and aggressive goals for our team, and they have responded very well with their strong customer focus, agility and execution, along with the continuous improvement mindset to produce favorable results for the first half of the year. And while I'm encouraged by our clear progress this year, I'm even more enthused about the potential of our business for long-term growth and margin enhancement in the years ahead.

Let's take a look at our performance across the 3 priorities I introduced at the start of the year, accelerating revenue growth, improving profitability and enhancing our liquidity position. With respect to our first priority, accelerating revenue growth, we delivered organic revenue growth of 14% in the second quarter when removing the impact of our Wound Business divestiture. This marks the third straight quarter of double-digit organic growth. And because of our first half performance and expected momentum continuing into the second half, we now anticipate delivering double-digit organic growth for the full year.

I'll share just a few highlights regarding our revenue. Starting with Surgical Solutions, we accelerated our double-digit growth in the second quarter with a strong performance in both Ultrasonics and Bone Graft Substitutes.

With respect to Ultrasonics, our team once again doubled the number of generators sold compared to the prior year, which is a leading indicator for expected acceleration of our disposable portfolio. And moving forward, we believe we have an incredible opportunity to invest and create transformational growth in multiple ways, including building our base in the spine market, penetrating additional high-potential growth segments, including neurosurgery, and by investing in new geographies. We're looking forward to leveraging this powerful combination to drive sustained double-digit growth in the years ahead.

Simultaneously, our Bone Graft Substitutes team continued to strengthen our commercial execution and growth with both existing and new distributors to further our market share gains. We also continue to advance innovation within our BGS portfolio with the recent FDA clearance for OSTEOAMP cannula, unlocking new opportunities for future growth in minimally invasive surgery in the spine segment.

With respect to our HA business for osteoarthritis, the team delivered double-digit growth again in the second quarter propelled by significant demand for Durolane, our single-injection therapy. We have a solid platform for sustained growth in HA with our clinical differentiation, dedicated commercial team, strength of our private payer coverage and significant opportunities for geographic expansion.

Moving along, after years of decline, we grew our Exogen business for the third straight quarter, and we expect mid-single-digit growth for the year. Keep in mind that this business previously generated over $100 million in annual revenue, but a lack of prioritization led to a significant decline. Now our team has returned the business to growth and with their focus on the fundamentals such as medical education, product enhancements and commercial execution, we have the potential to grow this business back over $100 million. The improved performance of our Exogen business is one of the clear indications that we have new momentum at Bioventus.

Next, I'd like to briefly mention that we have made the strategic decision to divest our Advanced Rehabilitation business. We are highlighting this today and in our 10-Q because we may sign an agreement during the third quarter. This prudent decision reflects our deep respect for our advanced rehabilitation team, our customers and the many patients who benefit from this life-changing technology. Our goal is for the business to be positioned in an environment that enables the higher focus and prioritization it deserves. This potential divestiture will also allow Bioventus to better focus on execution within our core businesses, continue accelerating our revenue and enhance our liquidity.

Now I'll shift to our second focus area, boosting profitability. With our peer-leading gross margin and our accelerated revenue growth, we significantly increased our adjusted EBITDA and operating margin. Adjusted EBITDA for the quarter was its highest to date at over $34 million, and we drove a 224 basis point increase in our adjusted EBITDA margin compared to the prior year. We now have an opportunity to invest selectively in high-potential areas to drive long-term profitable growth, including areas like R&D, medical education, commercial productivity and our supply chain, in the second half of the year. Even with these increased investments, we will continue to grow the bottom line faster than our top line, and we project our overall 2024 adjusted EBITDA margin to expand by more than 100 basis points compared to the prior year. We believe this level of annual margin improvement is sustainable as we capitalize on revenue acceleration, preserve our high gross margins with supply chain improvements and reallocate or reduce operational expenditures to invest in higher ROI initiatives or drop the savings to the bottom line.

And now I'll turn to our third major focus area, improving our liquidity position. We further reduced our net leverage ratio at the end of the second quarter with the increase in adjusted EBITDA and reduction in debt. Equally important, I want to highlight the significant increase in cash flow for the quarter. We are encouraged by the faster-than-anticipated reduction in our leverage ratio, and we will remain very focused on this priority moving forward. Given our progress, we're confident we can reduce our net leverage ratio to below 3x before we exit 2025.

That concludes my update on our 3 priorities. Before turning it over to Mark to dive deeper into our financials, I'll mention that, since joining Bioventus just 7 months ago, I've had the opportunity to continuously engage with many employees, customers and shareholders, and I want to take a moment to express my appreciation to all of our stakeholders. With your help, we're transforming Bioventus, and I'm confident that the work that's taking place across our organization to improve our fundamentals and unlock new long-term growth will advance our business and create significant shareholder value.

Now I'll turn the call over to Mark.

[Mark Singleton, executive]

Thanks, Rob, and good morning, everyone. Let me begin by saying that I am encouraged by the sustained improvement exhibited throughout our business over the past several quarters, and we are well-positioned to enhance our growth profitability and cash flow for the remainder of the year and into the future.

Now, turning to our results for the second quarter, revenue of $151 million increased 10% compared to the prior year. Adjusting for the divestiture of our Wound Business, organic revenue advanced 14%. We maintained our momentum across all 3 of our businesses as we achieved results ahead of our expectations. In addition, adjusted EBITDA of over $34 million increased $6 million and represented a 22% increase compared to the prior year. Year-to-date, adjusted EBITDA is up 27% compared to the prior year. The increase in the second quarter was driven by higher revenue and gross margin expansion.

Adjusted gross margin of 76% improved 180 basis points compared to the prior year. This is a result of favorable revenue mix given robust growth from the higher-margin HA and Surgical Solutions businesses, lower private payer rebates for our HA business and the impact from the divestiture of the lower-margin Wound Business.

Looking more closely at our revenue performance for the quarter, Surgical Solutions revenue accelerated by 16% as both Ultrasonics and BGS continue to generate double-digit growth. Through the diligent work of our product supply and commercial teams, we successfully navigated the recent supply challenge and drove growth above our expectations. As we move into the second half, we are steadily increasing supply and continue to enhance our sales planning and operations processes.

Pain Treatments revenue increased 17% compared to the prior year as we maintained double-digit growth for the third consecutive quarter driven by Durolane's brand recognition and the strength of our team's commercial execution. In addition, revenue was enhanced by a few million dollars from favorable mix shift, lowering our private payer rebates. We expect to maintain our strong execution in the second half and now project driving double-digit growth for the year.

Shifting to Restorative Therapies, sales fell 9% driven by the impact of our loan business divestiture, which accounted for 14 percentage points of the decline. On an organic basis, Restorative Therapies increased 5 percentage points, driven by Exogen. We are encouraged by Exogen's turnaround resulting from our efforts to improve the sales force execution and the impact of additional resources to assist our sales team.

Finally, our International segment grew 4% compared to the prior year, driven by Durolane. We expect growth to accelerate for the remainder of the year as we recover from delayed shipments for Ultrasonics earlier in this year, along with sustained double-digit growth for Durolane.

Moving down the income statement, adjusted total operating expenses were nearly $10 million compared to the prior year. The increase was primarily related to higher sales commissions from revenue growth and higher employee compensation from increased headcount.

Now, turning to our bottom-line financial metrics, adjusted operating income increased 12% to $31 million from $28 million in the prior year while our adjusted operating margin of 21% increased 40 basis points compared to the prior year period. Adjusted net income totaled $15 million, up 37% compared to the prior year. Adjusted earnings per share were $0.19 for the quarter, ahead of our expectations.

Now, turning to the balance sheet and cash flow statement, we ended the quarter with $32 million of cash on hand and $383 million of debt outstanding, an $8 million reduction for the quarter. We had $15 million drawn on our revolving credit facility at the end of the second quarter.

As Rob mentioned, we saw a significant sequential increase in cash flow this quarter. Operating cash flow represented an inflow of $15 million. We further reduced our net leverage ratio. And from a liquidity perspective, we remain well within compliance with our net leverage and interest coverage covenants.

With our expected reduction in debt and an increase in EBITDA over the remainder of 2024 and into 2025, we now expect our net leverage ratio to be below 3x before exiting 2025.

Finally, given the accelerated momentum in our business and increased expectations, let me update our 2024 financial guidance. Based on our team's solid execution of our business plan, we now expect net sales to be in the range of $557 million to $567 million. This represents a $19.5 million increase in the midpoint compared to our prior guidance of $535 million to $550 million.

From an organic growth perspective, the midpoint of the guidance range reflects an expected revenue growth of 10% in the second half of the year and over 12% growth for the full year. For the year, we expect adjusted EBITDA to now be between $104 million and $107 million. This represents a $9 million increase in the midpoint compared to our prior guidance of $94 million to $99 million. The midpoint of our guidance reflects expected adjusted EBITDA growth of 10% in the second half of the year and over 19% growth for the full year.

Finally, our guidance for adjusted earnings per share is now expected to be $0.36 to $0.42. This represents a $0.10 increase compared to the midpoint of our prior guidance of $0.25 to $0.33.

In closing, we are excited about our performance through the first half of the year and will remain diligent in our efforts to further enhance our revenue and adjusted EBITDA growth and drive improved cash flow.

Operator, please open the line for questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chase Knickerbocker from Craig-Hallum.

[Chase Knickerbocker, analyst]

Rob and Mark, congrats on another really nice quarter here. Maybe, Rob, just to start, what did you see, I guess, since the May update kind of in the recent quarter that led to the decision to divest restorative? The team historically has been pretty consistent that that is a nice kind of bottom line business, had never really committed to whether or not to divest. Kind of talk to me about what you saw kind of in the last quarter that kind of led to this decision?

[Robert Claypoole, executive]

I'll start, Chase, by just saying I have a lot of respect for this business and for the team and for the many patients who benefit from the life-changing technology. And it's -- one of the harder things to do is to divest a business or choose to divest a business that you respect so much, but it's the right thing to do for our stakeholders. And when we made this decision, it was with that in mind because our goal is to put the business in an environment that enables the higher focus it deserves. And so the decision was really driven by this business is fantastic, it has amazing technology, and it has more potential than it's realizing today. And at the same time, the potential divestiture allows Bioventus to better focus on execution within our core businesses where we have so much potential and to continue accelerating our profitable revenue growth. And as you know, it also enhances our liquidity. So that's really what drove the decision, Chase.

[Mark Singleton, executive]

Yes, Chase, this is Mark. I'll just add, from an overall financial accretion dilution perspective, that's really immaterial. I mean that actually is a lower-growth business, a lower margin, but overall, I'd say immaterial to the financials. But it does obviously reduce our debt levels.

[Chase Knickerbocker, analyst]

Makes sense. Got it. Maybe just shifting to Pain, a lot better than I think we -- anyone had expected. Can you help me a little bit with the drivers as far as kind of year-over-year? Was it mainly driven by volume? Did we start to see a fairly meaningful pricing benefit? Just kind of walk me through the drivers of the really strong organic growth number there.

[Mark Singleton, executive]

Yes, Chase, thanks. I mean, this is, again, really continued strong execution from our teams, and the sales team has done a great job of selling around all the contract positions that we have and obviously with Durolane being clinically differentiated. So I think it's really a continuation of what we've talked about for the last 3 quarters. We're starting to get into new areas like the VA and executing a lot better in the IDNs and being a lot more targeted with that. But the sales team has really done a great job over the first 2 quarters of selling around the contracts, the markets continuing to expand with a number of lives and opportunities.

But we talked about price a lot really and 2Q is mainly driven by all volumes. It's really the driver of this. And so feel really good about our performance there and heading into the second half where we talked about continuing to see double-digit growth for that business.

[Chase Knickerbocker, analyst]

Got it. And then just lastly on Surgical and then a quick gross margin question, it's kind of tough to peel apart kind of BGS versus Ultrasonics, but BGS continues to really kind of outperform certainly market growth rates. Can you just speak to -- is this just a continuation of kind of the distributor model being the right go-to-market strategy here and just got a lot of distributors who are excited about OSTEOAMP?

And then just on gross margins, Mark, I know we talked about, last quarter, things kind of going back to 74%, 75%, kind of mid-70s%, kind of more consistent from Q1. Is this a product mix that we should expect going forward or same kind of commentary as last quarter?

[Mark Singleton, executive]

Yes. On -- I'll get to BGS last. I'll take the margin question first. From a margin perspective, again, peer-leading gross margin is really a great asset for the -- for our company. And you can see the leverage that we drove in 2Q with that driving double-digit revenue growth, and you see the margin dropping through.

But from a second half perspective, we really benefited in the first half from a really, really strong mix in Surgical Solutions and our HA business, which are both really high-margin businesses where we saw growth. But in the second half, we'll see a slightly lower margin than the first half really as we start to get our International business back to the level of growth that we expect there. So that will bring the margin down a little bit in the second half from the first half.

From a BGS perspective, again, really good story overall in Surgical Solutions. Ultrasonics, as Rob mentioned in our prepared remarks, was -- continues to perform. We doubled the amount of generators that we sold last year, which is the leading indicator for disposables that are going to come, so really did a strong performance on Ultrasonics.

From a BGS perspective, it's really 2 things. One, we're seeing a lot better performance from our legacy distributors, which our sales team has done a great job of executing with. And I would just add that the growth that we're seeing there, even with the supply challenges that we've had, I mean, that just says that we can really even perform better as we work through the supply channel to stabilize in the second half.

But the other thing is we did a really strong, nice job of adding new distributors in the second half of last year. So it's really a combination of the legacy distributors, seeing a better performance out of them, and then also the kind of new groundwork that the team laid in the back half of last year. So really feel good about that as a growth driver in 2024 and into the future. Our share there are really low and really looking to -- still a lot of opportunity in front of us.

[Chase Knickerbocker, analyst]

Got it. Congrats again, guys.

[Operator]

The next question comes from Robbie Marcus from JPMorgan.

[Unknown Analyst]

This is actually [ Lily ] on for Robbie. And congrats on the good quarter. You raised the top line by more than you beat. So can you talk through how you're thinking about the back half of the year and where that incremental upside is coming from?

[Robert Claypoole, executive]

Sure. Let me -- this is Rob. I'll make a general comment about back half of the year, and then Mark can chime in. And that's just -- we had this really strong first half of the year. And for the back half, we feel good about, again, driving double-digit growth, top line and bottom line. And what this means for the full year is not just growing double digits, both top and bottom, but actually growing the bottom line 2x, almost 2x, the top line. So with that, I'll let Mark talk a little bit more about the details there.

[Mark Singleton, executive]

Yes, we feel good about it. I mean, double-digit growth in the back half of the year, while it's slightly less than what we saw in the first half, we feel really good about double-digit growth on the top line, double-digit growth on the bottom line, so really managing the P&L. From an overall revenue perspective, it's in line with the seasonality that we've historically seen after you kind of remove some of the onetime benefits that we mentioned in our prepared remarks around some of the private payer dynamics. So we think that the first half to second half makes sense on the top line, and again, still growing double digits, very healthy growth.

From a bottom line perspective, we're still growing double digits as well while we are also investing back into the business in things like medical education, strengthening our commercial execution and really starting to put money into R&D as well. If you think about where this business has been over the last 12 to 18 months, we've pretty much starved it and haven't been able to make these key investments. And we believe that these investments are going to help us in the back half, but also get us off to a really strong start in 2025 and start to fuel some of the growth drivers that we have in our International business and continue to accelerate our Ultrasonics growth.

So we feel really good about the guidance that we have in the second half and look forward to executing and delivering that.

[Robert Claypoole, executive]

And [ Lily ], this is Rob again. I'll just chime in. I think you may have mentioned what will contribute to it from a business standpoint. In the first half of the year, it was broad-based overachievement across our business, and we expect very strong performance across the business again for the second half.

[Unknown Analyst]

Got it. That's helpful. And then just following up on that, similarly, you put up really good EPS and adjusted EBITDA results, but I think guidance implies a step down over the back half of the year on the bottom line and on margins. So is that just conservatism, or are there other dynamics that we should be thinking about in 3Q and 4Q?

[Mark Singleton, executive]

I guess I'll just reiterate, if you look at -- in the second half where -- even with the step down that you're referring to, from an absolute perspective, we're still growing our bottom line EBITDA 10%, double-digits. So we're growing revenue 10%, on our midpoint of our guidance. We're growing EBITDA at 10%, on the midpoint of our guidance, and the step down really coming from those key investments that we talked about and starting to really take a disciplined approach in those investments. And we've been very disciplined over the last 18 months from an organization perspective of managing our expense really, really well, as our results speak for themselves with that. But we are -- we have to start to look at strategic investments that are going to drive -- start to drive growth in the medium and long term in R&D, medical education and commercial execution. So from a step-down perspective, that's really what's driving it. But again, through the first half of the year, we've grown our revenue 14% to 15% and growing our bottom line 28%. So we're going to start to use some of that money in a really disciplined way and thoughtful way to make sure we have the ROI on these investments that we're going to put back in, in the second half, that's really going to fuel the business in the back half, but also for the long term.

[Operator]

The next question comes from Caitlin Cronin from Canaccord.

[Unknown Analyst]

Rob and Mark, it's [ John ] on for Caitlin. [indiscernible] in the quarter. I just want to start on the hyaluronic acid business. The sales force -- can you talk about any continued progress made here as you look to target larger accounts? Have you been taking share as other players have deemphasized their sales organization in the segment?

[Robert Claypoole, executive]

I'll start off, [ John ]. Thanks for the comment and also the question. Yes, we continue to see success with our HA portfolio, in particular Durolane, with its strong performance above market growth, which means taking share from others. And a source of that growth is through the larger accounts that we previously mentioned and that you just touched on there. And so we feel really good about this.

I mean what's happening is that the clinical differentiation of Durolane in our overall portfolio is being recognized on an increased basis. And that dedicated commercial team that we have means that we live and breathe this business every day, very focused on it, and that's driving our success above market as well, but then also the combination of this private payer coverage and the opportunity for geographic expansion, not only in driving some short-term results but also sets us up for success over the coming years.

[Unknown Analyst]

Great. And just any update on TalisMann and the peripheral nerve business?

[Robert Claypoole, executive]

Yes. We mentioned previously that we're really excited about the technology. We don't expect any impact from TalisMann this year, any significant impact this year. It's still going through the FDA clearance. And once we have additional information, not just on that but also on the launch ahead, we'll be sure to include it in our earnings call or in separate conversations. But really excited about it.

Overall, when you take the P&S business, we have, across Bioventus, such a great mix of areas where we can grow above market to take market share and other areas where we can grow the overall category with our technology and our approach within P&S with TalisMann. It's both. We have both the opportunity to come out with it to take share and to grow the overall category. So stay tuned, and we'll tell you more about that in the coming quarters.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Rob Claypoole for closing remarks.

[Robert Claypoole, executive]

All right. Thanks, everyone, for your interest in Bioventus. As you know, we delivered significant improvements across our business in the second quarter, and we look forward to building on our momentum across our 3 priorities of accelerating revenue growth, improving profitability and enhancing our liquidity position to create significant shareholder value. Thanks, and have a good day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.