Good afternoon, and welcome to the First Quarter 2021 Earnings Conference Call for Bioventus Inc. [Operator Instructions] Please note that this call is being recorded and that the recording will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks today may 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 Securities and Exchange Commission, including Item 1A of the company's Form 10-K for the year ended December 31, 2020, as well as our most recent 10-Q filing to be filed 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 generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these 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 portions of our website. I would now like to turn the call over to Mr. Ken Reali, Bioventus' Chief Executive Officer. Sir, please go ahead.

Well, thank you, Jesse, and welcome, everyone, to Bioventus First Quarter 2021 Earnings Conference Call. I'm joined on the call today by Greg Anglum, our Chief Financial Officer. Let me provide you with a brief outline of what we intend to cover. I'll start by discussing our first quarter revenue performance and business trends, followed by a deep dive into the acquisition of Bioness, which we announced on March 30, and we believe represents a great example of how we plan to leverage our inorganic business development strategy to enhance our multiyear growth profile and leverage our significant customer presence across orthopedics, broaden our portfolio and increase our global footprint. After my opening remarks, Greg will provide you with a more in-depth review of our financial results for the first quarter 2021 and our financial guidance for full year 2021, which we updated in our press release this afternoon. And then we will open the call for your questions. Turning to a brief review of our first quarter results. We are pleased to report first quarter net sales of $81.8 million, which represents growth of 4% year-over-year, which exceeded our guidance expectations and was particularly impressive in light of the continued challenges in our external environment as the recovery from the global pandemic continues. Specifically, we experienced COVID-related business disruptions during the month of January, as the spike in cases in the second half of December carried over into the early part of 2021. We also saw modest business disruption related to inclement weather -- winter weather in certain parts of the U.S. during the month of February. Importantly, we saw accelerating sales trends throughout the month of March culminating with nearly 30% year-over-year growth in the final month of the quarter. Despite the ongoing challenges related to the pandemic,…

Thank you, Ken. Before we begin, I would like to highlight a few items for analysts and investors to bear in mind, during my prepared remarks this afternoon to avoid confusion when evaluating our reported results or when reviewing our historical financial results and SEC filings. First, as indicated in our press release this afternoon and further detailed in our 10-Q to be filed with the SEC, the historical results for the first quarter of 2020 periods presented are those of Bioventus LLC, the predecessor of Bioventus Inc. for financial reporting purposes. On February 16, 2021, the company successfully closed our IPO of common stock. Accordingly, these historical results do not reflect what the results of operations of Bioventus Inc. would have been had the IPO and related transactions occurred prior to such periods. Subsequent to the IPO and related transactions that occurred in connection with the IPO, the company is the sole managing member of Bioventus LLC and owns 72.2% of Bioventus LLC. The company has a majority economic interest, the sole voting interest in and controls the management of Bioventus LLC. Accordingly, for the period post-IPO, February 16, 2021, to quarter-end on April 3, 2021, our reported results reflect the attribution of net income to noncontrolling interest related to the 27.8% interest held by Smith & Nephew. Second, for the avoidance of doubt, and unless otherwise noted, my commentary will focus on the company's GAAP results for the first quarters of fiscal year 2021 and 2020. The for all non-GAAP references, we have included full reconciliations from our GAAP reported results to the related GAAP -- to the related non-GAAP item in our press release this afternoon. Third, my commentary regarding our financial results for the first quarter of 2021 were driven by the legacy Bioventus business only…

Thanks, Greg. Before opening the call for Q&A, I want to reiterate some of the finer points of the Bioventus growth strategy. Number one, we are confident in our multiyear organic growth. Which is compelling and fueled by our market penetration strategy with our HA and bone graft substitutes and expanding our indications in the minimally invasive fracture treatment area. Number two, our product pipeline is robust and is expected to fuel accretive growth in the medium-term with products like Agili-C, by CartiHeal, MOTYS and PROcuff as well as the injectable version of OSTEOAMP and talisman, the implantable, less invasive PNS device from Bioness. Number three, our M&A strategy is designed to bring in acquisitions that are expected to bring accretive growth to our business, such as Bioness and leverage our strong commercial infrastructure to bring about consistent double-digit growth. Number four, operationally, we are focused on continuous improvement to positively impact our margins, including cost savings initiatives from a manufacturing and supply chain perspective while also enhancing our quality programs to meet ongoing changes in our regulatory environment. And number five, most importantly, our strategy is backed by a highly engaged, results-driven culture that is fueled by an employee-driven mission to improve the lives of thousands of patients that are treated each day by one of our medical devices, returning them to active lives. With that, we will open the call up to take questions. Jesse?

[Operator Instructions] Speakers, first question is from the line of Drew Ranieri of Morgan Stanley.

Ken and Greg, just there's lots to unpack here in the quarter, and I appreciate all the commentary on Bioness. But just to start on guidance for a moment. You raised the bottom end of your organic guidance on the heels of the first quarter outperformance. And Ken you really sounded positive on recent trends. And Greg, you sounded positive on recent trends and underlying growth. Is there anything that's giving you particular pause in your channels as you kind of look through the rest of the year? And maybe could you just help us kind of better appreciate what gets you to the upper end of the range of the organic growth range?

Well, thanks, Drew, for joining the call. And the trends we saw in March were very encouraging. As we mentioned, the 30% growth year-over-year in March across all 3 verticals was extremely encouraging for us. The way we've looked at our guidance certainly is continued headwinds here in the first half of 2021 and things getting back to normal in the second half of 2021, predicated on the current trends externally relative to vaccinations and cases across the United States, Canada and Europe. So from our perspective, just continued execution and continued good things coming from the vaccination world and the pandemic slowly waning. Those are all key things for us to drive our business back to normalized growth, which is what we're anticipating in the second half of 2021.

Got it. And then just shifting gears for a moment to M&A. I mean with your first transaction, the public company, just how are you thinking about M&A for the rest of 2021? Do you need to digest this deal first? Are you kind of actively on the hunt to add another complementary business? And then just kind of with Bioness, I mean, it clearly opens up the business to expanded market opportunities. But I mean, where could you go next to further leverage your customer base?

Yes, sure, Drew. First of all, on the M&A side, look, we are constantly looking at our pipeline, adding new opportunities, subtracting things after we've looked at them more closely, of course, and the name of the game for us is opportunities that drive accretive revenue growth, getting us to consistent double-digit growth that leverage our commercial infrastructure and our overall infrastructure. So if we find things that fit that, that's not going to stop us relative to where we are with the Bioness integration. So we'll continue to look at things appropriately, and if they're the right fit, certainly pursue them more aggressively. As far as Bioness goes, we see a terrific synergy here across the business. As I talked about with the advanced rehab business, the adjacency of rehab facilities to the orthopedic offices, the ability of us to sell the L300 Go particularly for quadriceps strengthening, post total knee procedure are very compelling opportunities to expand that business beyond where they are today. And today, they are the market leader in this space in a very sophisticated device world that they sell into to make these patients better. We also are very excited by the peripheral nerve stimulation, PNS, business. We see great synergy across our key call points in sports medicine, total reconstruction, foot and ankle, and podiatric surgery. All of these areas are areas that struggle with pain, especially post-surgical pain. The opioid crisis has really opened the door for devices like this that work in the periphery to relieve pain without a prescription. That is where we're pointed. The team at Bioness has done a great job building a foundation. We look forward to working closely with them here, as we integrate that into our business and look forward to StimRouter and then eventually talisman, a fully implantable PNS device, launching that in 2022.

Got it. And I heard you mentioned just as a housekeeping question. Just DUROLANE growth in the quarter on a worldwide basis was 22%. Did I miss a U.S. growth rate?

No. They're -- we just cited the global growth rate there, Drew. Certainly, we continue to see great things in the U.S. as well. As that market continues to evolve in the U.S. to a single injection, we saw that accelerated somewhat with the pandemic, but DUROLANE is a flagship product. We're extremely excited by DUROLANE and its potential for continued growth in the market. Keeping in mind, it was just launched in 2018. It still has a -- I would call, a mild market share for a product of its caliber and we're extremely bullish on its continued growth in the U.S. market here in the years to come. And I would also add that the majority of revenue with DUROLANE, keep in mind, our HA revenue, international is only about 10% of our total revenue. So that puts the growth perspective, I think, for the U.S. market out there as well.

Next question is from the line of Robbie Marcus of JPMorgan.

This is actually Alan on for Robbie. I had a few quick ones. But just starting with the quarter itself, really good kind of top line performance. But then when you kind of adjust for all the onetimers, you were a little bit better than we had expected on EBITDA, but still didn't seem like we saw a kind of the full drop-through. So what drove kind of the top line, but then was offset on EBITDA, specifically looking at [indiscernible] gross margins or OpEx?

Sorry, Alan. So part of your question was what drove the top line. I think I'll come back to that in a second, but part of it was on the fall-through. We certainly have some of the top line growth fall-through to OpEx. I think the 2 things that sort of offset a little bit in the quarter, as I said in our prepared remarks, was we had some public company costs during the quarter as well as some higher-than-expected selling costs, really driven from the higher-than-expected sales. And so, we didn't quite get the fall-through that you might have expected, but it's really those 2 things.

Got it. And then kind of looking at the M&A question. When we look at Bioness, there's, obviously, going to be a bit of dilution this year. How accretive should we really be thinking about it in 2022 plus, some of that's probably upfront investment this year that should fall off next year? So how should we think about the accretion next year, given you did, I think, at year 1, it would be accretive to your net income?

Correct, Alan. And at this point, we're not giving full 2022 guidance yet. We do absolutely feel strongly that the business will be accretive to non-GAAP income beginning one year after close. We're continuing to work through integration and synergies and continuing to build that case. So we feel very good that it will move to being accretive. We have long-term goals in terms of continuing to improve our EBITDA margins, and we feel good about that. In lieu of that. But beyond that, it's hard to say with specificity right now. As we get closer to 2022, certainly, we'll give you more information on that.

And then like a final kind of just a strategy question. When we think -- and this is kind of linking to the previous questions that were asked, but like, when we think about your M&A strategy going forward, how should we think about your prioritization of bringing this really attractive kind of top line assets but at the same time, balancing dilution? Should we think of Bioness as kind of an acquisition that's like emblematic of what is kind of an acceptable amount of dilution or do you think you could like maybe push the envelope more? Or in the future, would you prefer to have to be less dilutive? Just your thoughts on that.

Yes. Drew, look -- or Robbie -- or Alan rather, sorry. Alan, I think it's all of the above. We're going to continue to look at every opportunity in isolation. And really, the profile we're looking for is strong adjacencies to where our business is today that leverage our commercial channel, our commercial call points, our broad expansion to orthopedics, certainly leverage our infrastructure and ultimately accretive growth over many years to come, getting to consistent double-digit growth. So from our perspective, that is the recipe. Now the type of deals that, that comes in can be a full gamut, and certainly being public allows us to look at many types of deals from private to public companies. I do want to shift gears, go back to your original question, Alan, on the growth drivers for the company in Q1 because it is very compelling, and it does start with our bone graft substitute business, which grew 33% over the prior 2020 quarter. We're very proud of that. We're very proud of the DUROLANE growth at 22%, the continued growth in our overall HA portfolio, where we are now the #2 player in the HA business and the return to growth of EXOGEN and our minimally invasive fracture treatment area in the month of March. All of those were huge drivers in addition to the international business, which also saw growth for the first time since the start of the pandemic. So really clicking on many levers for growth and certainly a terrific quarter, and I want to make sure we highlighted that for you.

Next question is from the line of Amit Hazan of Goldman Sachs.

Maybe start with Bioness and just make sure we've got this clear with regard to your sales guide for the year. So you talked about -- I think, the run rate for last year 2020 was about $40 million. You're guiding to roughly $30 million for these 3 quarters. So help us out just to understand, it's obviously a growing business. So just to understand what happened there, if that's kind of some of the materiality in Q1 or just kind of bridge that for us, if you will.

Sure, Amit. Happy to do that. As you said, we put out the debt at $40 million last year. Our guidance is $30 million to $32 million for the period post close for us. At Bioness, they did $9.6 million in the first quarter. And so, that's the rate they're on. So that sort of lets you back into what we see the rest of the year going forward. Again, like any business, they were certainly impacted by COVID as well. We're waiting to see the impacts of how it comes out of COVID. They had a very similar story that we did with respect to through the first quarter in terms of March was much better than January and February. And so, we certainly need to see that business a little bit longer before we get -- perform at that level a little bit more before we get more bullish on what perhaps it could do.

I would -- yes, I would just highlight, historically, the business has been a double-digit performer prior to the pandemic. So certainly, we look at it both ways, Amit.

Okay. That's helpful. And just on -- I just think it through guidance in really the next few months and into your comments on the third quarter. First of all, I wonder if we can push you a little bit on the March commentary and just see if you can give us a little bit of color how things have gone in April and May and whether we've seen that kind of growth sustained. And then just as we get to know you and how you describe things in your 3Q commentary about kind of "normalization", just help us out in understanding what that actually means for you, what kind of growth does kind of a normal environment mean if you can define that better for us.

Sure, Amit, and I'll try and address both of those. I guess, first, with respect to the second quarter, certainly, we hope to continue to see the trends that we had in April we're not going to necessarily provide you with each monthly trend. We feel pretty good that with the trends we've seen so far in April, we feel good about the number we gave you for second quarter growth of 67% to 74%. And so, we'll just stick with that from a growth perspective in the second quarter. And then you also asked about -- sorry, Q3 -- sorry, the -- sorry, Amit, I just -- I lost your question for just a second.

I can repeat, no problem.

Yes, go ahead.

I was just going to say, it's just that normalization comment just to better define it in the third quarter, what does it means?

Got you. We mentioned that we expect normalization for the second half of the year, thank you. Again, historically, in our legacy business, we've been a mid- to high single-digit grower. So that's certainly part of the normalization and then you would certainly layer the Bioventus growth on top of that to get to our full year guidance range that we've provided to you of getting to the -- what is it, the $394 million to $406 million for the full year.

Okay. And then just last one for me. You mentioned a couple of times now, but the BGS growth that was a lot better than last quarter. I don't know if that's just the comp thing or I'm just curious about the acceleration there, if you can just add a little bit more color as to what you think might be going on in that market or for your products in particular.

Yes. Amit, let me be clear on that, 33% growth. There is absolutely 0 stocking in that growth. These are cases. All of our inventory is either held by us or held in consignment at the hospital before a case so that is just driven by pure market share gains, a terrific job and execution by our team. And a compelling product line and a compelling strategy, where we continue to gain new customers as well as whole hospital conversions with our strategy of a superior product line and the cost savings opportunity, they can save on bone graft substitutes. I'll say once again, being agnostic to spine hardware is a true advantage we have. Because we can go in and really just look at that line item, which is significant for spine surgery, spinal fusion surgery and offer a win-win opportunity that also works great for all the surgeons because they love our product. They love the way it handles. So that's what's driving that. It's pure growth. And certainly, the return of elective procedures as the quarter moved forward was a big advantage for us as well. And that is something we look forward to as we continue to unfold in 2021 as that continued strong growth.

[Operator Instructions] Next question is from the line of Kyle Rose of Canaccord.

So a lot to unpack from the quarter here. I wonder if we could just start from a high level. I mean, obviously, you see -- you saw your great progression through the Q1, and particularly in March, you're talking positively about the Q 2, just wondered, are you seeing any sort of pent-up demand in the channel from a procedural standpoint. Obviously, seeing something like the 33% execution on the bone -- on the BGS side. I mean that's exceptional. Trying to understand how much of that is maybe some catch-up and then will normalize a little bit versus how we should think about just some of the pent-up demand.

Yes, Kyle, I think we should break it down by vertical to really understand that. First of all, in our joint preservation area, the HA area clearly, there was some reticence to return to doctors' offices, particularly in the early part of the quarter based on the strength of the pandemic, the number of cases. And what's happened because the priority in the vaccinations was older people who are our primary HA customers, as they got vaccinated, they returned to some normalcy, getting their HA injections, for instance, visiting their doctors. So that progressed through the quarter. So that was the HA story, strong progression all the way through. EXOGEN, the minimally invasive fracture treatment vertical, a little bit different because EXOGEN was impacted less in the beginning of the pandemic, but more as we went through the pandemic. And a lot of that is driven by the time from the incident that it occurs, the actual fracture incident to when EXOGEN is required, and that can be anywhere from 3 months to 12 months post injury when you'd use the EXOGEN device. So we've seen steady improvement in EXOGEN through the course of the pandemic and that was really culminated by a breakout in March, where we saw some really solid growth. And I think that's somewhat returned to normalcy, not just in March, of course, but you got to rewind 6 months and look at where the country was. I don't feel that the surge that we saw in the fourth quarter will have as dramatic of an impact down the road on EXOGEN because certainly, a lot of people continued activities. It wasn't a shutdown like we experienced in March and April and May of last year. And then the bone graft substitute business, I think, there was some pent-up demand, certainly from the December and early January time frame and even some of the winter weather that we had in February. So bone graft substitutes was definitely impacted, and we saw a great return there and strength increasing through the quarter -- through quarter 1.

And again, on the bone graft substitute business, we expect, as we said, low to mid-20% growth overall for the year. So that should give you an indication as well.

Okay. Yes, that's very helpful. And then I've just got 2 more, I'll ask them upfront. You've got some new products launching, but then also some products before the FDA for review. Just wondered if you could give us an update on the pipeline when we think about the rollout of MOTYS as well as the submission for the fifth metatarsal on the EXOGEN system. And then the second one is, you talked a lot about Bioness and spent some time helping us understand that acquisition and the opportunities. How long do you see some of those commercial synergies playing out before you really start leveraging both sides of the business and driving incremental growth?

Yes. It's an excellent question. Why don't we start by MOTYS, the Phase II trial with MOTYS, the IND trial continues to enroll patients. So great progress there towards eventual BLA. As far as EXOGEN goes, we did just receive a deficiency letter from FDA just a couple of weeks ago here in April, and we are going to be addressing that with FDA. There is a potential delay on timing of the bone study PMA supplement approval, but we really can't weigh in on that until we have further information, and we have further discussions with FDA. These deficiency letters on a PMA are somewhat complex, and it does take some discussion time with FDA to work through the actual action plan. So more to come on that. And then the talisman, we expect 510 (k) clearance on that particular product in 2022 and the launch of that product in 2022 as well. What's going on now from a adjacency or integration perspective, is we are training and starting a pilot on StimRouter with our Bioventus sales force. And actually, that is going on as we speak, where we're getting our sales reps who are extremely excited working with Bioness StimRouter team, and we're going to start that process here this quarter. So very excited about that. We continue to work through the integration on the advanced rehabilitation area. But excited once again to get the L300 Go and look at the orthopedic opportunities that, that presents as well. So a lot of levers here, Kyle, for growth, both with our pipeline as well as with the integration -- ongoing integration with Bioness.

Since we are currently showing no additional participants in the queue, that will conclude our conference call for today. Thank you all for participating. You may now disconnect.

Thank you, Jesse. Thank you, everybody.