S-1/A 1 d22578ds1a.htm AMENDMENT NO. 1 TO FORM S-1 Amendment No. 1 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 19, 2016

Registration No. 333-212329

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Bioventus Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware
  3841
  81-0980861
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
         

4721 Emperor Boulevard, Suite 100

Durham, North Carolina 27703

(919) 474-6700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Anthony P. Bihl III

Chief Executive Officer

Bioventus Inc.

4721 Emperor Boulevard, Suite 100

Durham, North Carolina 27703

(919) 474-6700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Charles K. Ruck, Esq.

Wesley C. Holmes, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

Telephone: (212) 906-1200

Fax: (212) 751-4864

 

Arthur D. Robinson, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Telephone: (212) 455-2000

Fax: (212) 455-2502

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of
securities to be registered
 

Proposed

maximum

aggregate

offering price(1)

 

Amount of

registration fee(2)(3)

Class A Common Stock, $0.001 par value per share

  $182,647,044   $18,392.56

 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
(3)   $15,105 of the registration fee was previously paid by the Registrant.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated July 19, 2016

Preliminary prospectus

8,823,529 Shares

 

LOGO

Class A common stock

 

 

This is the initial public offering of shares of Class A common stock of Bioventus Inc. We are selling 8,823,529 shares of our Class A common stock.

Prior to this offering, there has been no public market for our Class A common stock. The estimated initial public offering price is between $16.00 and $18.00 per share. We expect to list our Class A common stock on The NASDAQ Global Market, or NASDAQ, under the symbol “BIOV”.

We will use the net proceeds that we receive from this offering to purchase from Bioventus LLC newly-issued common membership interests of Bioventus LLC, which we refer to as the “LLC Interests.” There is no public market for the LLC Interests. The purchase price for the newly-issued LLC Interests will be equal to the public offering price of our Class A common stock, less the underwriting discounts and commissions referred to below. We intend to cause Bioventus LLC to use the net proceeds it receives from us in connection with this offering as described in “Use of proceeds.” Simultaneous with this offering, certain of the indirect owners of membership interests in Bioventus LLC, whom we refer to as “Former LLC Owners,” will exchange their indirect ownership interests for shares of Class A common stock and certain other holders of membership interests in Bioventus LLC, whom we refer to as “Continuing LLC Owners,” will retain their membership interests in Bioventus LLC.

We will have two classes of common stock outstanding after this offering: Class A common stock and Class B common stock. Each share of Class A common stock and Class B common stock entitles its holder to one vote on all matters presented to our stockholders generally. All of our Class B common stock will be held by the Continuing LLC Owners, on a one-to-one basis with the number of LLC Interests they own. Immediately following this offering, the holders of our Class A common stock issued in this offering collectively will hold 37.2% of the economic interests in us and 26.5% of the voting power in us, the Former LLC Owners, through their ownership of Class A common stock, collectively will hold 62.8% of the economic interests in us and 44.8% of the voting power in us, and the Continuing LLC Owners, through their ownership of all of the outstanding Class B common stock, collectively will hold no economic interest in us and the remaining 28.7% of the voting power in us. We will be a holding company, and upon consummation of this offering and the application of proceeds therefrom, our principal asset will be the LLC Interests we purchase from Bioventus LLC and acquire from the Former LLC Owners, representing an aggregate 71.3% economic interest in Bioventus LLC. The remaining 28.7% economic interest in Bioventus LLC will be owned by the Continuing LLC Owners through their ownership of LLC Interests.

We will be the sole managing member of Bioventus LLC. We will operate and control all of the business and affairs of Bioventus LLC and, through Bioventus LLC and its subsidiaries, conduct our business.

Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules for NASDAQ-listed companies. See “Transactions” and “Management—Corporate governance.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. See “Prospectus summary—Implications of being an emerging growth company.”

 

      Per share      Total  

Initial public offering price

   $                                $                            

Underwriting discounts and commissions (1)

   $                                $                            

Proceeds to us, before expenses

   $                                 $                             

 

(1)   See “Underwriting” for additional information regarding underwriting compensation.

We have granted the underwriters an over-allotment option for a period of 30 days to purchase up to 1,323,529 additional shares of Class A common stock.

Investing in shares of our Class A common stock involves risks. See “Risk factors” beginning on page 23.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on                 , 2016.

 

 

 

J.P. Morgan    Piper Jaffray
Stifel   

Leerink Partners

 

 

The date of this prospectus is                 , 2016.


Table of Contents

LOGO


Table of Contents

Table of contents

 

Prospectus summary

     1   

Risk factors

     23   

Special note regarding forward-looking statements

     70   

Use of proceeds

     72   

Dividend policy

     73   

Transactions

     74   

Capitalization

     78   

Dilution

     79   

Unaudited pro forma consolidated financial information

     82   

Selected financial data

     92   

Management’s discussion and analysis of financial condition and results of operations

     94   

Industry

     131   

Business

     139   

Management

     177   

Executive compensation

     185   

Certain relationships and related party transactions

     199   

Principal stockholders

     206   

Description of capital stock

     208   

Description of indebtedness

     214   

Shares eligible for future sale

     218   

Material U.S. federal income tax consequences to non-U.S. holders

     221   

Underwriting

     225   

Legal matters

     230   

Experts

     230   

Where you can find more information

     230   

Index to financial statements

     F-1   

 

 

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of Class A common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: Neither we nor any of the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who have come into possession of this prospectus in a jurisdiction outside the United States are required to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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Basis of presentation

In connection with the closing of this offering, we will effect certain organizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions and this offering, which we refer to collectively as the “Transactions.” See “Transactions” for additional information regarding the Transactions.

As used in this prospectus, unless the context otherwise requires, references to:

 

 

“we,” “us,” “our,” the “Company,” “Bioventus,” “Bioventus Inc.” and similar references refer: (i) following the consummation of the Transactions, including this offering, to Bioventus Inc., and, unless otherwise stated, all of its subsidiaries, including Bioventus LLC, which we refer to as “Bioventus LLC,” and, unless otherwise stated, all of its subsidiaries, and (ii) on or prior to the completion of the Transactions, including this offering, to Bioventus LLC and, unless otherwise stated, all of its subsidiaries.

 

 

“Acquisition” refers to our acquisition of BioStructures, LLC, or BioStructures, on November 24, 2015.

 

 

“Continuing LLC Owners” refers to our chief executive officer and Smith & Nephew, Inc., each of whom will continue to own LLC Interests (as defined below) after the Transactions and who may, following the consummation of this offering, exchange their LLC Interests for shares of our Class A common stock (upon redemption or cancellation of the same number of their shares of our Class B common stock) or a cash payment (if mutually agreed) as described in “Certain relationships and related party transactions—Bioventus LLC Agreement.”

 

 

“Essex Woodlands Health Ventures” refers to Essex Woodlands Health Ventures Fund VIII, L.P., Essex Woodlands Health Ventures Fund VIII-A, L.P. and Essex Woodlands Health Ventures Fund VIII-B, L.P.

 

 

“Former LLC Owners” refers to all of the Original LLC Owners (including Essex Woodlands Health Ventures, but excluding the Continuing LLC Owners) who will exchange their indirect ownership interests in Bioventus LLC for shares of our Class A common stock in connection with the consummation of this offering.

 

 

“LLC Interests” refer to the single class of newly-issued common membership interests of Bioventus LLC.

 

 

“Original LLC Owners” refer to the direct and certain indirect owners of Bioventus LLC, collectively, prior to the Transactions, including the members of the Voting Group (as defined below).

 

 

“Phantom Plan Participants” refer to certain individuals who hold existing awards under the Phantom Profits Interest Plan, which we refer to as the “Phantom Plan,” and will, in connection with this offering, receive rights to receive shares of Class A common stock upon settlement of their awards as described in “Executive compensation—Narrative to summary compensation table—Elements of compensation—Equity-based compensation—Phantom profits interest units.”

 

 

“Voting Group” refers collectively to (i) Essex Woodlands Health Ventures, (ii) Smith & Nephew, Inc., a U.S. based subsidiary of Smith & Nephew plc, or Smith & Nephew or S&N and (iii) certain other Original LLC Owners, all of whom will be parties to the Stockholders Agreement as described in “Description of capital stock—Stockholders Agreement.” The Voting Group will hold Class A common stock and Class B common stock representing in the aggregate a majority of the combined voting power of our common stock.

We will be a holding company and the sole managing member of Bioventus LLC, and upon completion of this offering and the application of proceeds therefrom, our principal asset will be LLC Interests of Bioventus LLC.

 

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Bioventus LLC is the predecessor of the issuer, Bioventus Inc., for financial reporting purposes. Bioventus Inc. will be the audited financial reporting entity following this offering. Accordingly, this prospectus contains the following historical financial statements:

 

 

Bioventus Inc. The historical financial information of Bioventus Inc. has not been included in this prospectus as it is a newly incorporated entity, has no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus.

 

 

Bioventus LLC. As we will have no other interest in any operations other than those of Bioventus LLC and its subsidiaries, the historical consolidated financial information included in this prospectus is that of Bioventus LLC and its subsidiaries.

The unaudited pro forma financial information of Bioventus Inc. presented in this prospectus has been derived by the application of pro forma adjustments to the historical consolidated financial statements of Bioventus LLC and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to the Acquisition and the Transactions as described in “Transactions,” including the completion of this offering, as if all such transactions had occurred on January 1, 2015, in the case of the unaudited pro forma consolidated statements of operations data for the year ended December 31, 2015 and the three month periods ended March 28, 2015 and April 2, 2016, and as of April 2, 2016, in the case of the unaudited pro forma consolidated balance sheet data. See “Unaudited pro forma consolidated financial information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

Trademarks, trade names and service marks

This prospectus includes our trademarks and trade names, such as Bioventus, Durolane, Exogen, Exponent, OsteoAMP, OsteoPlus, PureBone, Signafuse and our logo. This prospectus also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this prospectus appear without any “™” or “®” symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

Market and industry data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from iData Research, Inc., or iData. Other information concerning our industry and the markets in which we operate is based on independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk factors” and “Special note regarding forward-looking statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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Prospectus summary

The following summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the risks of investing in our Class A common stock discussed under the heading “Risk factors,” and the financial statements and related notes included elsewhere in this prospectus before making an investment decision.

Overview

We are a global medical technology company focused on developing and commercializing innovative and proprietary orthobiologic products for the treatment of patients suffering from a broad array of musculoskeletal conditions. Our products address the growing need for clinically effective, cost efficient and minimally invasive solutions that enhance the body’s natural healing processes. For the year ended December 31, 2015 and the three months ended April 2, 2016, we generated $253.7 million and $65.4 million of net sales, respectively. We operate our business through four reportable segments: Active Healing Therapies—U.S., Active Healing Therapies—International, Surgical and BMP.

 

 

Active Healing Therapies—U.S. and International.    Our Active Healing Therapies segments offer two types of non-surgical products: our market-leading, non-invasive Exogen system for long bone stimulation for fracture healing and hyaluronic acid, or HA, viscosupplementation therapies for osteoarthritis pain relief. Our Exogen system is a U.S. Food and Drug Administration premarket approved, or PMA, product that offers significant advantages over competitors’ long bone stimulation systems, including shorter treatment times, superior nonunion heal rates based on a comparison of available PMA clinical data and a broader label that is the only label for a long bone growth stimulator for certain fresh fractures. Our two PMA approved HA viscosupplementation therapies are: Supartz FX, a five injection therapy, which we market in the United States, and GelSyn-3, a three injection therapy, which we expect to launch in the United States in the second half of 2016. We also market Durolane, a single injection therapy, outside the United States and own certain related assets.

 

 

Surgical.    Our Surgical segment offers a portfolio of advanced bone graft substitutes with 510(k) clearance or regulated as HCT/Ps in the United States that are designed to improve bone fusion rates following spinal fusion and other orthopedic surgeries. These products include our OsteoAMP allogeneic growth factor, a range of bioactive synthetics, a collagen ceramic matrix, a demineralized bone matrix, or DBM, and allograft comprising demineralized cancellous bone in different preparations. Our development pipeline includes additional bone graft substitutes.

 

 

BMP.    Our BMP segment is comprised of proprietary next-generation bone morphogenetic protein, or BMP. Our next-generation BMP product candidates are designed to offer at least equivalent efficacy at a lower dose administration and provide a better-controlled release to address the safety concerns associated with Infuse Bone Graft, or Infuse, the current market-leading bone graft. Our pre-clinical data are based on animal models, including non-human primate studies, which may not be indicative of results that we will experience in clinical trials with human subjects.

We were founded in May 2012, when a group led by Essex Woodlands Health Ventures Inc. acquired a majority stake in the biologics business of Smith & Nephew plc, which included Exogen, exclusive U.S. distribution rights to Supartz and exclusive distribution rights to Durolane outside the United States. Our investors believed that the biologics business would provide a platform from which to build a global leader in the rapidly evolving

 

 

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orthobiologics market. Since our founding, we have assembled an experienced senior executive team to execute this vision. This team has successfully accomplished the following:

 

 

Established our Surgical business through the acquisition and integration of the OsteoAMP product line in 2014 and the BioStructures business in 2015.

 

 

Accelerated the research and development of our next-generation BMP product candidates by obtaining an exclusive worldwide license to an intellectual property portfolio.

 

 

Enhanced our Active Healing Therapies business by securing distribution rights to commercialize a broader set of HA viscosupplementation therapies.

We currently market and sell our products in the United States and 29 other countries. Our Exogen system and Supartz FX, which accounted for the majority of our revenue for the year ended December 31, 2015, have regulatory approvals to be marketed and sold in the United States. In addition, we also have regulatory approval to market and sell our Exogen system in key international markets, such as the European Union and Canada. As of April 2, 2016, our sales organization consisted of approximately 232 direct sales representatives and 124 independent distributors in the United States and approximately 57 direct sales representatives and 12 independent distributors internationally. In the United States, our Active Healing Therapies sales organization markets our products to orthopedists, musculoskeletal and sports medicine physicians and podiatrists. Our Surgical sales organization is composed of a sales management team that markets our surgical products primarily to neurosurgeons and orthopedic spine surgeons. In international markets, we market and sell our Active Healing Therapies through direct sales representatives in twelve countries and through independent distributors in an additional 17 countries. Our products are typically covered and reimbursed by third-party payors, including government authorities, such as Medicare and Medicaid, managed care providers and private health insurers. We have grown our total net sales from $232.4 million for the year ended December 31, 2013 to $242.9 million for the year ended December 31, 2014 and to $253.7 million for the year ended December 31, 2015, at a compound annual growth rate, or CAGR, of 4.5%. We have grown our total net sales from $53.4 million for the three months ended March 28, 2015, to $65.4 million for the three months ended April 2, 2016, at an annual growth rate of 22.5%. For the years ended December 31, 2013, 2014 and 2015 and the three months ended March 28, 2015 and April 2, 2016, we had net losses of $22.4 million, $12.9 million, $34.1 million, $21.0 million and $6.0 million, respectively. We have grown our Adjusted EBITDA from $32.5 million for the year ended December 31, 2013 to $36.2 million for the year ended December 31, 2014 and to $42.2 million for the year ended December 31, 2015, at a CAGR of 14.0%. Also, we have grown our Adjusted EBITDA from $2.3 million for the three months ended March 28, 2015, to $10.7 million for the three months ended April 2, 2016, at an annual growth rate of 365.2%. Adjusted EBITDA is burdened by BMP program costs of $0.7 million, $6.7 million and $11.3 million, for the years ended December 31, 2013, 2014 and 2015, respectively, and $2.5 million and $2.5 million for the three months ended March 28, 2015 and April 2, 2016, respectively. For a reconciliation of net loss to Adjusted EBITDA, see Note 3 to the information contained in “—Summary historical and pro forma financial information.”

Industry background

Market opportunity

Orthobiologics are used to accelerate the healing of, or reduce pain experienced in, bones, joints or damaged musculoskeletal tissue by harnessing the body’s natural healing processes. We believe the current U.S. annual total market opportunity for orthobiologic products is approximately $3.0 billion and will grow at approximately 4–5% annually for the next five to seven years. There is additional opportunity outside the

 

 

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United States, particularly in HA viscosupplementation. These estimates for the U.S. market include non-surgical products, such as long bone growth stimulation and HA viscosupplementation therapies; surgical bone graft substitutes such as allografts, DBMs, synthetics, stem cells, BMPs/growth factors; spinal stimulation; cell therapies and orthopedic cartilage repair products. Market growth is being driven by improving technologies and unaddressed market needs, an aging population, increased incidence of spinal disorders driving the need for spinal fusion surgery and increased incidence of osteoarthritis leading to the need for HA viscosupplementation therapy or surgery.

The chart below summarizes the U.S. orthobiologics market, key product categories and our products in each of those categories:

 

      U.S current
market size
(in millions)
     2014–2021
Market
CAGR
     Primary applications    Bioventus product
offerings (1)

Non-surgical

Long bone stimulation

   $ 300         1.9%      

•  Fracture repair

  

•  Exogen

HA viscosupplementation (2)

   $ 873         6.1%      

•  Alleviation of osteoarthritis pain through single, three or five injection viscosupplementation regimens

  

•  Supartz FX, Durolane+, GelSyn-3*

  

 

 

Subtotal

   $ 1,173            
  

 

 

Surgical—Bone graft substitutes

           

Allografts

   $ 132         (0.9)%      

•  Spinal fusion, trauma and other bone repair applications

  

•  Purebone

DBMs

   $ 365         2.3%      

•  Spinal fusion, trauma and other bone repair applications

  

•  Exponent

Synthetics

   $ 361         5.7%      

•  Spinal fusion, trauma and other bone repair applications

  

•  Signafuse, Interface, Osteoplus

Stem cells

   $ 178         16.9%      

•  Spinal fusion, trauma and other bone repair applications

  

•  No offerings

BMPs/growth factors

   $ 372         0.6%      

•  Spinal fusion, trauma and other bone repair applications

  

•  OsteoAMP

  

 

 

Subtotal

   $ 1,408         5.2%         
  

 

 

Other markets

           

Spinal stimulation

   $ 250         N/A      

•  Spinal fusion

  

•  No offerings

Cell therapy

   $ 143         4.0%      

•  Injectable platelet-rich plasma used for soft tissue repair

  

•  No offerings

Orthopedic cartilage repair

   $ 92         3.8%      

•  Autograft-, allograft- and microfracture-based cartilage repair

  

•  No offerings

  

 

 

Subtotal

   $ 485            
  

 

 

Total

   $ 3,066            

 

 

Source:   iData 2015 U.S. Market for Orthopedic Biomaterials, except spinal stimulation data.
(1)   See “Business” for additional information regarding our products.
(2)   The HA viscosupplementation market is comprised of single injection ($279 million market), three injection ($431 million market) and five injection ($163 million market) products.
+   We do not market this product in the United States.
*   We expect to launch GelSyn-3 in the United States in the second half of 2016.

 

 

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We believe the orthobiologics market is characterized by a set of specific product development, regulatory, sales and marketing and purchasing dynamics that include the following:

 

 

Lack of focus resulting in inadequate allocation of resources by existing orthobiologics competitors;

 

Increasing regulatory complexity and scrutiny;

 

Historical lack of investment in clinical data and clinical education; and

 

Hospitals increasingly favoring end-to-end orthobiologics providers.

As a result of these factors, we believe there is an opportunity for a company to achieve leadership in the global orthobiologics market by focusing on developing and commercializing a portfolio of clinically validated, cost-effective products for use both in and out of the surgical suite. Additionally, we believe there is room to grow the worldwide orthobiologics market opportunity beyond its current size of approximately $4.5 billion, by developing therapies that are superior to, or have a broader label than, existing bone graft substitutes or HA viscosupplementation therapies.

Our competitive strengths

We believe we have the following competitive strengths:

 

 

Sufficient scale combined with an exclusive focus on orthobiologics.     We believe we are the only company exclusively focused on the orthobiologics market with annual net sales over $100 million. We believe we have sufficient scale and resources to be competitive and relevant in the marketplace, but are small enough to respond quickly to internal and external opportunities.

 

 

Leadership and strong competitive positions in Active Healing Therapies.     Our Active Healing Therapies segments generated all of their $227.9 million in net sales in 2015 from PMA approved products, including our market-leading Exogen system and the HA viscosupplementation therapies that we own or distribute. We believe our direct salesforce of over 300 representatives is among the largest sales forces in our industry.

 

 

Portfolio of advanced orthobiologics that address a variety of surgeon needs.     We offer a portfolio of advanced orthobiologics products that enables us to fulfill a greater portion of the orthobiologics needs of neurosurgeons and orthopedic spine surgeons than many of our competitors. We believe our current product portfolio, combined with our pipeline that includes next-generation and additional indications and formulations of our products, positions us to be a portfolio provider of surgical orthobiologic solutions.

 

 

Next-generation BMP product candidates in development.     Infuse revolutionized certain types of spinal fusion by enabling faster recovery time and improved bone healing, but safety concerns have limited its ability to be used across a broader range of procedures. In more than 80 non-human primate studies, our next-generation BMP product candidates have demonstrated at least equivalent efficacy to Infuse at one-tenth the dosage. However, non-human primate studies may not be indicative of results that we will experience in clinical trials with human subjects. Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome.

 

 

Seasoned management focused on profitable growth.     Our senior leadership team has been involved in growing large businesses or business lines, major acquisitions and integrations, public company sale transactions, as well as the development, approval and launch of transformative medical devices and orthobiologics. We have grown net sales from $232.4 million as of December 31, 2013 to $253.7 million as of December 31, 2015 and made significant investments in our product pipeline, while growing Adjusted EBITDA.

 

 

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Our strategy

 

 

Grow our Surgical business by investing in our portfolio and expanding our distribution network.     Through the acquisition of BioStructures, we expanded our existing distribution network and broadened our product portfolio. We intend to sell both OsteoAMP and BioStructures products through this expanded distribution network of approximately 135 independent distributors. Additionally, we are continuing to invest in product development and clinical studies. Over the long term, we believe we can be a portfolio provider of orthobiologics to hospitals by offering bone graft substitutes backed by clinical and economic data.

 

 

Advance our next-generation BMP product candidates.    We are investing significant resources into our next-generation BMP product candidates. We intend to enter clinical trials for transforaminal lumbar interbody fusion, or TLIF, posterior lumbar interbody fusion, or PLIF, and open tibial fractures, which we believe represent an approximately $240 million market for BMP-2 products in the United States in the aggregate. We intend to enter a Phase 1 clinical trial within 18 months and expect to demonstrate advancement of our product candidates through a number of milestones over the next two years. However, we cannot determine with certainty the timing of initiation, duration or completion of future clinical trials of our BMP product candidates. Upon the first commercial sale of a product candidate, Pfizer Inc., or Pfizer, will assign us certain intellectual property rights covered by our license agreement.

 

 

Grow our Active Healing Therapies business through new product introductions and selling strategies.    We intend to grow our HA viscosupplementation therapies business by commercializing GelSyn-3, a three injection therapy, to which we recently obtained the U.S. distribution rights from Institut Biochimique SA, or IBSA. We believe this will enable us to contract with a broader set of payors. In addition, we intend to continue to grow sales of our Exogen system by introducing new technology-based decision-making tools that assist physicians in deciding when to prescribe long bone growth stimulators, as well as highlighting our Exogen system’s shorter treatment times, superior nonunion heal rates based on a comparison of available PMA clinical data and its broader label which is the only label for a long bone growth stimulator that includes certain fresh fractures.

 

 

Selectively pursue business development opportunities.    We have completed five acquisitions, licensing and distribution agreements since our founding in 2012. We intend to continue to selectively pursue business development opportunities that add to our Surgical business as well as broaden our Active Healing Therapies business. We will continue to be disciplined when evaluating opportunities and look for products that have clinical differentiation and cost-effectiveness.

 

 

Focus on continued Adjusted EBITDA growth.     We have increased our Adjusted EBITDA, while making significant investments in our development pipeline. Additionally, we are focused on continuing to increase our Adjusted EBITDA over time by leveraging the investments we have made to date, as well as maintaining our cost focus.

Summary of risks associated with our business

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider the risks discussed in the section entitled “Risk factors,” including the following risks, before investing in our Class A common stock:

 

 

we are highly dependent on a limited number of products;

 

 

we compete and may compete in the future against other companies, some of which have longer operating histories, more established products or greater resources than we do, which may prevent us from achieving increased market penetration or improved operating results;

 

 

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clinical trials of our next-generation BMP product candidates may fail to satisfactorily demonstrate safety and efficacy or we may be unable to obtain regulatory approval for, or successfully commercialize our next-generation BMP product candidates;

 

 

our long-term growth depends on our ability to develop, acquire and commercialize additional orthobiologic products;

 

 

our HCT/P products are subject to extensive government regulation and our failure to comply with these requirements could cause our business to suffer;

 

 

we have incurred significant net losses since inception, and we may not be able to achieve or sustain profitability; and

 

 

we have identified material weaknesses in our internal control over financial reporting.

Summary of the transactions

Prior to the consummation of this offering and the organizational transactions described below, the Original LLC Owners are the only owners of Bioventus LLC. Bioventus Inc. was incorporated as a Delaware corporation on December 22, 2015 to serve as the issuer of the Class A common stock offered hereby. In connection with the closing of this offering, we will consummate the following organizational transactions:

 

 

we will amend and restate the amended and restated limited liability company agreement of Bioventus LLC, as amended, effective as of the completion of this offering, or the Bioventus LLC Agreement, to, among other things, (i) provide for LLC Interests that will be the single class of common membership interests in Bioventus LLC, (ii) exchange all of the existing membership interests (including profit interests awarded under the Bioventus LLC Management Incentive Plan, or MIP) in Bioventus LLC for LLC Interests and (iii) appoint Bioventus Inc. as the sole managing member of Bioventus LLC;

 

 

we will amend and restate Bioventus Inc.’s certificate of incorporation to, among other things, (i) provide for Class A common stock and Class B common stock, each share of which entitles its holders to one vote per share on all matters presented to Bioventus Inc.’s stockholders and (ii) issue shares of Class B common stock to the Continuing LLC Owners, on a one-to-one basis with the number of LLC interests they own;

 

 

we will issue 8,823,529 shares of our Class A common stock to the purchasers in this offering (or 10,147,058 shares of our Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

we will use all of the net proceeds from this offering (including any net proceeds received upon exercise of the underwriters’ option to purchase additional shares of Class A common stock) to acquire newly-issued LLC Interests from Bioventus LLC at a purchase price per interest equal to the initial public offering price per share of Class A common stock, less underwriting discounts and commissions, collectively representing 26.5% of Bioventus LLC’s outstanding LLC Interests (or 29.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

Bioventus LLC will use the proceeds from the sale of LLC Interests to Bioventus as described in “Use of proceeds;”

 

 

the Former LLC Owners will exchange their indirect ownership interests in Bioventus LLC for shares of Class A common stock on a one-to-one basis, representing (i) approximately 44.8% of the combined voting power of all of Bioventus Inc.’s common stock (or approximately 43.0%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) approximately 44.8% of the economic

 

 

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interest in the business of Bioventus LLC and its subsidiaries (or approximately 43.0%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

the Phantom Plan will be terminated and the Phantom Plan Participants will receive rights to receive up to 513,117 shares of Class A common stock upon settlement of their awards under the Phantom Plan, with such settlement expected to take place on the twelve month anniversary following the date of termination of the Phantom Plan as described in “Executive compensation—Narrative to summary compensation table—Equity-based compensation—Phantom profits interest units” (settlement may result in a change in the timing over which compensation expense is recognized as described in “Management’s discussion and analysis of financial condition and results of operations — Components of our results of operations — Selling, general and administrative expenses” and Bioventus will receive a corresponding number of LLC Interests from Bioventus LLC upon settlement);

 

 

the Continuing LLC Owners will continue to own the LLC Interests they received in exchange for their existing membership interests in Bioventus LLC, which LLC Interests, following this offering, will be redeemable, at the election of such members, for newly-issued shares of Class A common stock on a one-for-one basis or, if Bioventus Inc. and such members agree, a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement; provided that, at Bioventus Inc.’s election, Bioventus Inc. may effect a direct exchange of such Class A common stock or such cash (if mutually agreed) for such LLC Interests. Shares of Class B common stock will be cancelled on a one-for-one basis if we, at the election of a Continuing LLC Owner, redeem or exchange LLC Interests of such Continuing LLC Owners pursuant to the terms of the Bioventus LLC Agreement; and

 

 

Bioventus Inc. will enter into (i) a tax receivable agreement, or Tax Receivable Agreement, with the Continuing LLC Owners, (ii) a stockholders agreement, or the Stockholders Agreement, with the Voting Group and (iii) a registration rights agreement, or the Registration Rights Agreement, with the Original LLC Owners. Upon the consummation of this offering, the Continuing LLC Owners will own (x) 9,571,764 shares of Bioventus’ Class B common stock (which will not have any liquidation or distribution rights), representing approximately 28.7% of the combined voting power of all of Bioventus’ common stock (or approximately 27.6%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (y) LLC Interests, representing approximately 28.7% of the economic interest in the business of Bioventus LLC and its subsidiaries (or approximately 27.6%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

 

We refer to the foregoing transactions collectively as the “Transactions.” For more information regarding our structure after the completion of the Transactions, including this offering, see “Transactions.”

 

 

Immediately following this offering, Bioventus Inc. will be a holding company and its principal asset will be the LLC Interests it purchases from Bioventus LLC and acquires from the Former LLC Owners. As the sole managing member of Bioventus LLC, we will operate and control all of the business and affairs of Bioventus LLC and, through Bioventus LLC and its subsidiaries, conduct our business. Accordingly, we will have the sole voting interest in, and control the management of, Bioventus LLC. As a result, we will consolidate Bioventus LLC in our consolidated financial statements and will report a non-controlling interest related to the LLC Interests held by the Continuing LLC Owners on our consolidated financial statements.

See “Description of capital stock” for more information about our certificate of incorporation and the terms of the Class A common stock and Class B common stock. See “Certain relationships and related party transactions” for more information about (i) the Bioventus LLC Agreement, including the terms of the LLC Interests and the

 

 

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redemption right of the Continuing LLC Owners; (ii) the Tax Receivable Agreement; (iii) the Registration Rights Agreement; and (iv) the Stockholders Agreement. Under the Stockholders Agreement, any increase or decrease in the size of our board of directors or any committee, and any amendment to our organizational documents, will in each case require the approval of Essex Woodlands Health Ventures and certain other members of the Voting Group, for so long as they collectively own at least 10% of the total shares of our Class A common stock owned by them as of the date this offering is consummated, and will also require the approval of Smith & Nephew, for so long as Smith & Nephew collectively owns at least 10% of the total shares of our Class B common stock owned by them as of the date this offering is consummated.

 

 

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The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

LOGO

 

 

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Recent Developments

Selected preliminary financial results for the three months ended July 2, 2016

We estimate that for the three months ended July 2, 2016:

 

 

Net sales will be between $69.6 million and $72.5 million, an increase of approximately 8.0% at the midpoint of the range as compared to $65.8 million for the three months ended June 27, 2015. The estimated increase in net sales is primarily due to an increase in net sales from our Surgical segment partially attributable to the BioStructures acquisition in the fourth quarter of 2015 as well as higher sales from other surgical products.

 

 

Net (loss) income will be between $(0.7) million and $1.9 million as compared to net loss of $(4.1) million for the three months ended June 27, 2015. The estimated improvement in our net (loss) income compared to the corresponding period in 2015 is primarily due to an increase in operating income from our Surgical segment driven by increased sales and a lower change in the fair value of contingent consideration. These increases were partially offset by increased BMP expenses.

 

 

Adjusted EBITDA will be between $12.8 million and $15.3 million, which includes $3.2 million of BMP expenses, an increase of 12.8% at the midpoint of the range, as compared to $12.5 million, which includes $2.3 million of BMP expenses, for the three months ended June 27, 2015. The estimated increase in Adjusted EBITDA is primarily due to an increase in operating income from our Surgical segment partially offset by increased BMP expenses.

 

 

Net sales for our Active Healing Therapies—U.S. segment will be between $49.0 million and $51.0 million, a slight increase of approximately 0.2% at the midpoint of the range as compared to $49.9 million for the three months ended June 27, 2015.

 

 

Net sales for our Active Healing Therapies—International segment will be between $10.0 million and $10.4 million, a slight decrease of approximately 0.9% at the midpoint of the range as compared to $10.3 million for the three months ended June 27, 2015. The estimated decrease in net sales is primarily due to the termination of our Russian distributor relationship and fluctuations in demand in several markets partially offset by favorable foreign currency translation adjustments.

 

 

Net sales for our Surgical segment will be between $10.6 million and $11.1 million, an increase of approximately 93.8% at the midpoint of the range as compared to $5.6 million for the three months ended June 27, 2015. The estimated increase in net sales is primarily attributable to the BioStructures acquisition.

We include Adjusted EBITDA in this prospectus for the reasons as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Components of Our Results of Operations—Adjusted EBITDA.” Adjusted EBITDA has certain limitations in that it does not reflect all expense items that affect our results. These and other limitations are described in Footnote 3 to the table under “Prospectus summary—Summary historical and pro forma financial data.” We encourage you to review our financial information in its entirety and not rely on a single financial measure.

 

 

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The following table reconciles net loss to Adjusted EBITDA for the three months ended June 27, 2015 and July 2, 2016:

 

      Three Months Ended  
(Dollars in millions)    June 27, 2015     July 2, 2016  
(unaudited)           Low     High  

Net (loss) income

   $ (4.1   $ (0.7   $ 1.9   

Interest expense, net

     3.3        3.2        3.2   

Income tax expense

     0.8        0.6        0.6   

Depreciation and amortization(a)

     8.4        8.0        8.0   
  

 

 

 

EBITDA

     8.4        11.1        13.7   

Non-cash equity compensation(b)

     0.6        0.7        0.7   

Restructuring costs(c)

     0.4                 

Contingent consideration(d)

     3.1        (0.6     (0.6

Other corporate expenses(e)

            1.2        1.1   

Inventory step up(f)

            0.4        0.4   
  

 

 

 

Adjusted EBITDA

   $ 12.5      $ 12.8      $ 15.3   

 

 

 

(a)   Includes depreciation and amortization recorded in cost of sales of $5.8 million and $5.1 million for the three months ended June 27, 2015 and July 2, 2016, respectively, in addition to depreciation and amortization in the consolidated statements of operations and comprehensive loss of $2.6 million and $2.9 million for the three months ended June 27, 2015 and July 2, 2016, respectively.

 

(b)   Represents non-cash equity compensation resulting from two equity-based compensation plans, the MIP and the Phantom Plan.

 

(c)   Represents expenses relating to the restructuring and relocating of certain U.S. finance functions and headcount reductions in our international business to improve operating efficiency.

 

(d)   Represents expense related to changes in the fair value of contingent consideration related to the OsteoAMP acquisition.

 

(e)   Represents expenses associated with Bioventus LLC preparing to become a public company, primarily accounting and legal fees.

 

(f)   Represents non-cash expense recorded in cost of sales for BioStructures inventory subject to valuation step-up as a result of purchase accounting.

We have provided a range for our preliminary results described above because our financial closing procedures for the three months ended July 2, 2016 are not yet complete. We currently expect that our final results will be within the ranges described above. However, these estimates are preliminary and are based upon our estimates and the information available to management as of the date of this prospectus. Therefore, it is possible that our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments and other developments which may arise between now and the time our financial results for the three months ended July 2, 2016 are finalized.

Accordingly, you should not place undue reliance on these preliminary estimates. In addition, the estimated data is not necessarily indicative of our results for the full fiscal year or future period. The preliminary estimated range of unaudited financial data for the three months ended July 2, 2016 included in this prospectus have been prepared by, and are the responsibility of, our management and have not been reviewed or audited

 

 

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or subjected to any other procedures by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to the preliminary estimated range of unaudited financial data.

Implications of being an emerging growth company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to:

 

 

reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data in the registration statement on Form S-1 of which this prospectus is a part;

 

 

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;

 

 

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; and

 

 

exemptions from the requirements of holding a non-binding advisory vote on executive compensation and the requirement to obtain stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these exemptions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC, or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Corporate information

Bioventus Inc., the issuer of the Class A common stock in this offering, was incorporated in Delaware on December 22, 2015. Bioventus LLC was organized in Delaware as a limited liability company in November 23, 2011. Our principal executive offices are located at 4721 Emperor Boulevard, Suite 100, Durham, NC 27703. Our telephone number is (919) 474-6700. Our corporate website is www.bioventusglobal.com. The information contained on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus or in deciding to purchase our Class A common stock.

 

 

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The offering

 

Issuer

Bioventus Inc.

 

Class A common stock offered by us

8,823,529 shares (or 10,147,058 shares if the underwriters exercise in full their option to purchase additional shares)

 

Underwriters’ option to purchase additional shares of Class A common stock

1,323,529 shares

 

Class A common stock to be issued to Former LLC Owners

14,904,090 shares

 

Class A common stock to be outstanding immediately after this offering

23,727,619 shares (or 25,051,148 shares if the underwriters exercise in full their option to purchase additional shares)

 

Class B common stock to be outstanding immediately after this offering

9,571,764 shares, all of which will be owned by the Continuing LLC Owners.

 

Voting Rights

Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law. Each share of Class A common stock and Class B common stock will entitle its holder to one vote per share on all such matters. See “Description of capital stock.”

 

Voting power held by purchasers in this offering

26.5% (or 29.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Voting power held by the Former LLC Owners

44.8% (or 43.0%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Voting power held by all holders of Class A common stock after giving effect to this offering

71.3% (or 72.4%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Voting power held by all holders of Class B common stock after giving effect to this offering

28.7% (or 27.6%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

 

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Voting power held by the Original LLC Owners after giving effect to this offering

73.5% (or 70.7%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Ratio of shares of Class A common stock to LLC Interests

Our amended and restated certificate of incorporation and the Bioventus LLC Agreement will require that we at all times maintain a ratio of one LLC Interest owned by us for each share of Class A common stock (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities) and Bioventus LLC at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Interests owned by us, as well as a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing LLC Owners and the number of LLC Interests owned by the Continuing LLC Owners. This construct is intended to result in the Continuing LLC Owners having a voting interest in Bioventus Inc. that is substantially the same as the Continuing LLC Owners’ percentage economic interest in Bioventus LLC. The Continuing LLC Owners will own all of our outstanding Class B common stock.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $135.6 million (or approximately $156.5 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), assuming the shares are offered at $17.00 per share (the midpoint of the price range listed on the cover page of this prospectus).

 

  We intend to use the net proceeds that we receive from this offering to purchase 8,823,529 newly-issued LLC Interests from Bioventus LLC at a purchase price per interest equal to the initial public offering price per share of Class A common stock less underwriting discounts and commissions and estimated offering expenses payable thereon.

 

  We intend to cause Bioventus LLC to use such proceeds (i) to repay all of the outstanding borrowings under our second lien term loan facility, together with a prepayment premium and accrued and unpaid interest thereon, (ii) to repay a $23.5 million promissory note and a $5.0 million deferred payment relating to the Acquisition when due in 2016, (iii) to repay all of the outstanding borrowings under our first lien revolving facility and (iv) with any remaining net proceeds used for general corporate purposes. See “Use of proceeds.”

 

Redemption rights of holders of LLC Interests

The Continuing LLC Owners, from time to time following the offering, may require Bioventus LLC to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis or, if Bioventus and such members agree, a cash payment equal to the volume

 

 

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weighted average market price of one share of our Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for

  stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement; provided that, at Bioventus Inc.’s election, we may effect a direct exchange of such Class A common stock or such cash (if mutually agreed) for such LLC Interests. See “Certain relationships and related party transactions—Bioventus LLC Agreement.” Shares of our Class B common stock will be cancelled on a one-for-one basis if we, at the election of a Continuing LLC Owner, redeem or exchange LLC Interests of such Continuing LLC Owner pursuant to the terms of the Bioventus LLC Agreement.

 

Registration Rights Agreement

Pursuant to the Registration Rights Agreement, we will, subject to the terms and conditions thereof, agree to register the resale of the shares of our Class A common stock that are issuable to the Continuing LLC Owners upon redemption or exchange of their LLC Interests and the shares of our Class A common stock that are issued to the Former LLC Owners in connection with the Transactions. See “Certain relationships and related party transactions—Registration Rights Agreement.”

 

Controlled company

Following this offering we will be a “controlled company” within the meaning of the corporate governance rules of The NASDAQ Global Market. See “Management—Corporate governance.” By becoming a stockholder, you will be deemed to have notice of and consented to provisions of our amended and restated certificate of incorporation that allocate certain corporate opportunities between us and our Original LLC Owners. See “Description of capital stock—Corporate opportunities.”

 

Dividend policy

We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our Class A common stock. Any future determination to pay dividends to holders of Class A common stock will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, restrictions in Bioventus LLC’s debt agreements and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by Bioventus LLC and its subsidiaries, and therefore we will only be able to pay dividends from funds we receive from Bioventus LLC. Our ability to pay dividends may also be restricted by the terms of any credit agreement or any debt or preferred equity securities of ours or of our subsidiaries. See “Dividend policy.”

 

Tax Receivable Agreement

We will enter into the Tax Receivable Agreement with Bioventus LLC and the Continuing LLC Owners that will provide for the payment by us to the Continuing LLC Owners of 85% of the amount of tax benefits, if any, that we actually realize (or in some circumstances are deemed to realize) as a result of (i) increases in the tax basis of assets of Bioventus LLC resulting from any redemptions or

 

 

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exchanges of LLC Interests described above under “—The offering—Redemption rights of holders of LLC interests” and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement. See “Certain relationships and related party transactions—Tax Receivable Agreement.”

 

Stockholders Agreement

Pursuant to the Stockholders Agreement, the Voting Group will hold Class A common stock and Class B common stock representing approximately 72.9% of the combined voting power of all of our common stock. Until such time as Essex Woodlands Health Ventures and certain other members of the Voting Group own less than 10% of the total shares of our Class A common stock owned by them as of the date this offering is consummated, and Smith & Nephew collectively owns less than 10% of the total shares of our Class B common stock owned by them as of the date this offering is consummated, or the Stockholders Agreement is otherwise terminated in accordance with its terms, the parties to the Stockholders Agreement will agree to vote their shares of Class A common stock and Class B common stock in favor of the election of the nominees of certain members of the Voting Group to our board of directors upon their nomination by the nominating and corporate governance committee of our board of directors.

 

Risk Factors

Investing in shares of our Class A common stock involves a high degree of risk. See “Risk factors” for a discussion of factors you should carefully consider before investing in shares of our Class A common stock.

NASDAQ Global Market symbol

“BIOV”

The number of shares of Class A common stock to be outstanding after this offering is based on the membership interests of Bioventus LLC outstanding as of July 2, 2016, and excludes:

 

 

2,981,436 shares of Class A common stock reserved for issuance under our 2016 Incentive Award Plan as described in “Executive compensation—New incentive arrangements”, consisting of (i) 2,514,265 shares of Class A common stock issuable upon the exercise of options to purchase shares of Class A common stock granted on the date of this prospectus to our directors and certain employees, including the named executive officers, in connection with this offering as described in “Executive Compensation—Director Compensation” and “Executive Compensation—New Equity Awards,” and (ii) 467,171 additional shares of Class A common stock reserved for future issuance (exclusive of the additional shares available for issuance under the 2016 Incentive Award Plan pursuant to the annual increase each calendar year beginning in 2017 and ending in 2026 as described in “Executive compensation—New incentive arrangements”);

 

 

513,117 shares of Class A common stock reserved as of the closing date of this offering for future issuance to the Phantom Plan Participants upon settlement of their awards as described in “Executive compensation—Narrative to summary compensation table—Elements of compensation—Equity-based compensation—Phantom profits interest units”;

 

 

373,616 shares of Class A common stock reserved for issuance under our Employee Stock Purchase Plan as described in “Executive compensation—New incentive arrangements”; and

 

 

9,571,764 shares of Class A common stock reserved as of the closing date of this offering for future issuance upon redemption or exchange of LLC Interests by the Continuing LLC Owners.

Unless otherwise indicated, this prospectus assumes the shares of Class A common stock are offered at $17.00 per share (the midpoint of the price range listed on the cover page of this prospectus). Certain share

 

 

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information presented in this prospectus will vary depending on the initial public offering price in this offering, as well as the number of shares being offered hereby to the public. For example, the amount of shares of Class A common stock reserved for issuance under our 2016 Incentive Award Plan and our Employee Stock Purchase Plan, the amount of shares of Class A common stock issuable upon the exercise of options to purchase shares of Class A common stock granted on the date of this prospectus, and the relative allocation of the shares of common stock issued in the Transactions as among the Continuing LLC Owners, the Former LLC Owners and the Phantom Plan Participants will vary, depending on the initial public offering price in this offering. In addition, the relative allocation of the shares of common stock issued in the Transactions as between the Original LLC Owners and the Phantom Plan Participants, on the one hand, and the investors in this offering, on the other hand, will vary, depending on the initial public offering price in this offering and the number of shares being offered hereby to the public.

Unless otherwise indicated, this prospectus assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock and no exercise of outstanding options after July 2, 2016.

 

 

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Summary historical and pro forma financial data

The following tables present the summary historical and pro forma financial data for Bioventus LLC and its subsidiaries for the periods and at the dates indicated. Bioventus LLC is the predecessor of the issuer, Bioventus Inc., for financial reporting purposes. The summary statements of operations data for the years ended December 31, 2013, 2014 and 2015 are derived from the Bioventus LLC audited financial statements included elsewhere in this prospectus. The summary statements of operations data for the three months ended March 28, 2015 and April 2, 2016, and the summary balance sheet data as of April 2, 2016 are derived from the Bioventus LLC unaudited financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the information set forth herein. You should read this data together with our audited and unaudited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Capitalization,” “Selected financial data” and “Management’s discussion and analysis of financial condition and results of operations.” Our historical results are not necessarily indicative of our future results and results of interim periods are not necessarily indicative of results for the entire year.

The summary unaudited pro forma consolidated financial data of Bioventus Inc. presented below have been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma balance sheet data as of April 2, 2016 give effect to the Acquisition and the Transactions as described in “Transactions”, including the completion of this offering, as if all such transactions had occurred on that date and the summary unaudited pro forma statement of operations data for the year ended December 31, 2015 and the three months ended March 28, 2015 and April 2, 2016 gives effect to the Transactions, as if all such transactions had occurred January 1, 2015. The unaudited pro forma financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future. See “Unaudited pro forma consolidated financial information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma consolidated financial data.

 

 

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The summary historical data of Bioventus Inc. have not been presented as Bioventus Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

     Historical Bioventus LLC          Pro forma
Bioventus Inc.(1)
 
    

Year ended

        Three months ended         Year ended     Three months ended  
(in thousands, except per share and share
amounts)
  December 31,
2013
   

December 31,

2014

   

December 31,

2015

       

March 28,

2015

    April 2,
2016
       

December 31,

2015

    April 2,
2016
 

Consolidated statements of operations data:

                 

Net sales

  $ 232,375      $ 242,893      $ 253,650        $ 53,362      $ 65,402        $ 265,824      $ 65,402   

Cost of sales (including depreciation and amortization of $16,693, $19,622, $22,474, $5,741, and $6,300, respectively)

    71,372        75,792        74,544          16,807        19,235          80,598        19,235   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Gross profit

    161,003        167,101        179,106          36,555        46,167          185,226        46,167   

Selling, general and administrative expenses

    150,370        147,058        148,441          37,270        40,184          160,265        41,724   

Research and development expenses

    10,936        9,465        14,747          2,966        3,718          15,176        3,766   

Change in fair value of contingent consideration

           1,590        19,493          8,971        1,301          19,493        1,301   

Restructuring costs

                  2,443          1,076        172          2,443        172   

Depreciation and amortization

    7,765        8,968        10,570          2,571        2,830          12,124        2,830   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Operating income (loss)(2)

    (8,068     20        (16,588       (16,299     (2,038       (24,275     (3,626

Interest expense

    11,459        11,969        14,229          3,854        3,555          6,993        1,641   

Other (income) expense

    713        (596     1,154          496        (147       1,120        (147
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Other expense, net

    12,172        11,373        15,383          4,350        3,408          8,113        1,494   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Loss before income taxes

    (20,240     (11,353     (31,971       (20,649     (5,446       (32,388     (5,120

Income tax expenses

    2,127        1,547        2,140          369        603          2,140        603   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Net loss

    (22,367     (12,900     (34,111       (21,018     (6,049       (34,528     (5,723

Less: Net (loss) income attributable to non-controlling interests

                  (9,909     (1,643
               

 

 

   

 

 

 

Net (loss) income attributable to Bioventus

                  (24,618     (4,080

Accumulated and unpaid preferred distributions

    (3,610     (3,718  

 

(3,997

      (953     (1,042      
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

       

Net loss attributable to common unit holders

    (25,977     (16,618  

 

(38,108

      (21,971     (7,091      

Net loss per common unit, basic and diluted

    (5.30     (3.39     (7.78       (4.48     (1.45      

Weighted average common units outstanding, basic and diluted

    4,900        4,900        4,900          4,900        4,900         

Pro forma weighted average shares of Class A common stock outstanding:

                 

Basic

    23,727,619        23,727,619   

Diluted

    23,727,619        23,727,619   

Pro forma net loss per share of Class A common stock outstanding:

                 

Basic

  $ (1.04   $ (0.17

Diluted

  $ (1.04   $ (0.17

Other Financial Data:

                 

Adjusted EBITDA(3)(4)

  $ 32,485      $ 36,193      $ 42,186        $ 2,339      $ 10,677        $ 45,861 (5)    $ 10,677   

 

 

 

     Years ended          Three months ended  
(in thousands)  

December 31,

2013

   

December 31,

2014

   

December 31,

2015

        March 28,
2015
    April 2,
2016
 

Consolidated statements of cash flows data:

Net cash (used in) provided by:

           

Operating activities

  $ 2,749      $ 15,109      $ 18,920        $ (3,821   $ 2,162   

Investing activities

    (10,999     (31,376     (60,185       (306     (6,638

Financing activities

    6,801        (6,645     31,246          3,852        5,495   

Effect of exchange rate changes on cash and cash equivalents

    (514     (1,428     (805       (470     197   
 

 

 

     

 

 

 

Net (decrease) increase in cash and cash equivalents

  $ (1,963   $ (24,340   $ (10,824     $ (745   $ 1,216   

 

 

 

 

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             Pro forma Bioventus Inc.  
        As of April 2, 2016    

  As of April 2, 2016

 
(in thousands)               

Balance sheet data:

    

Cash and cash equivalents

   $ 6,166      $ 32,493   

Total assets

     486,264        510,591   

Total liabilities

     299,962        191,900   

Accumulated deficit

     (97,975       

Total members’/stockholders’ equity

     186,302        318,691   

 

   

 

 

 

 

(1)   Gives pro forma effect to the Acquisition and the Transactions. See “Unaudited pro forma consolidated financial information.”

 

(2)   During the year ended December 31, 2013, in connection with our divesture from S&N, we recorded $4,690 of transition expenses, such as product rebranding, legal fees and consulting expenses. During the year ended December 31, 2015 and the three months ended March 28, 2015 and April 2, 2016, we recorded an expense of $19,493, $8,971 and $1,301, respectively related to changes in the fair value of contingent consideration related to the OsteoAmp acquisition.

 

(3)   We define EBITDA as net loss plus interest expense, income tax expense, and depreciation and amortization. We define Adjusted EBITDA as net income before depreciation and amortization, interest expense and provision for income taxes, adjusted for the impact of certain cash and non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include non-cash equity compensation, restructuring costs, contingent consideration, transition costs, severance, OsteoAMP inventory step-up, and purchased in-process R&D. We present EBITDA and Adjusted EBITDA because we believe they are useful indicators of our operating performance. Our management uses EBITDA and Adjusted EBITDA principally as measures of our operating performance and believes that EBITDA and Adjusted EBITDA are useful to our investors because they are frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. Our management also uses EBITDA and Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. Adjusted EBITDA is burdened by BMP program costs of $650, $6,682, and $11,309, for the years ended December 31, 2013, 2014, and 2015, respectively, and $2,491 and $2,535 for the three months ended March 28, 2015 and April 2, 2016, respectively. We have incurred development costs related to our BMP product candidates in each of the past three years, and we expect to incur significant costs related to our BMP product candidates in future periods. Such costs are not added back in the calculation of our Adjusted EBITDA. See “Management’s discussion and analysis of financial condition and results of operations —Strategic Transactions — BMP portfolio.”

EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. generally accepted accounting principles, or GAAP. EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for a measure of our liquidity or operating performance prepared in accordance with GAAP, and are not indicative of net loss from operations as determined under GAAP. In addition, EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. EBITDA, Adjusted EBITDA and other non-GAAP financial measures have limitations that should be considered before using these measures to evaluate our liquidity or financial performance. Some of these limitations are as follows:

 

   

EBITDA and Adjusted EBITDA exclude certain tax payments that may require a reduction in cash available to us;

 

 

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EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures (including capitalized software developmental costs) or contractual commitments;

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA and Adjusted EBITDA do not reflect the cash requirements necessary to service interest or principal payments on our debt; and

 

   

Adjusted EBITDA excludes certain purchase accounting adjustments related to the Acquisition.

In addition, our definition and calculation of EBITDA and Adjusted EBITDA may differ from that of other companies. We compensate for these limitations by relying primarily on our GAAP results and by using non-GAAP financial measures only supplementally.

The following table presents a reconciliation of net loss to EBITDA and Adjusted EBITDA for the periods presented:

 

                                                  Pro Forma Bioventus Inc.
 
    Year ended    

 

  Three months ended    

 

 

Year ended

    Three
months
ended
 
(in thousands, except per
share and share amounts)
 

December 31,

2013

   

December 31,

2014

   

December 31,

2015

        March 28,
2015
    April 2,
2016
        December 31,
2015
   

April 2,

2016

 

Net loss

  $ (22,367   $ (12,900   $ (34,111     $ (21,018     $ (6,049     $ (34,528   $ (5,723

Interest expense, net

    11,459        11,969        14,229          3,854        3,555          6,993        1,641   

Income tax expense

    2,127        1,547        2,140             369        603             2,140        603   

Depreciation and amortization(a)

    24,458        28,820        33,078          8,394        9,137          38,054        9,137   
 

 

 

     

 

 

     

 

 

 

EBITDA

    15,677        29,436        15,336          (8,401     7,246          12,659        5,658   

Non-cash equity compensation(b)

    576        2,355        3,325          529        288          9,677        1,876   

Restructuring costs(c)

           1,183        2,645          1,076        172          2,645        172   

Contingent consideration(d)

           1,590        19,493          8,971        1,301          19,493        1,301   

Transition costs(e)

    4,690                                                 

Other corporate expenses(f)

                  1,107                 1,370          1,107        1,370   

Severance(g)

    4,542                                                 

Inventory step-up(h)

           1,629        280          164        300          280        300   

Purchased in-process R&D-BMP(i)

    7,000                                                 
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Adjusted EBITDA

  $ 32,485      $ 36,193      $ 42,186        $ 2,339      $ 10,677        $ 45,861      $ 10,677   

 

     

 

 

     

 

 

 

 

(a)   Includes depreciation and amortization recorded in cost of sales of $16,693, $19,622 and $22,474 for the years ended December 31, 2013, 2014, and 2015, respectively, and depreciation and amortization recorded in R&D expenses of $0, $230 and $34 for the years ended December 31, 2013, 2014 and 2015, respectively, in addition to depreciation and amortization shown on the consolidated statements of operations and comprehensive loss of $7,765, $8,968 and $10,570 for the years ended December 31, 2013, 2014 and 2015, respectively. Includes depreciation and amortization recorded in cost of sales of $5,741 and $6,300 for the three months ended March 28, 2015 and April 2, 2016, respectively, and depreciation and amortization recorded in R&D expenses of $82 and $7 for the three months ended March 28, 2015 and April 2, 2016, respectively, in addition to depreciation and amortization shown on the consolidated statements of operations and comprehensive loss of $2,571 and $2,830 for the three months ended March 28, 2015 and April 2, 2016, respectively. On a pro forma basis the year ended December 31, 2015 includes an incremental $4,976 of amortization expense, of which $3,459 is included in pro forma cost of cost of sales and $1,517 in pro forma R&D expenses.

 

(b)   Represents non-cash equity compensation resulting from two equity-based compensation plans, the MIP and the Phantom Plan. On a pro forma basis includes incremental compensation expense of $6,352 for the year ended December 31, 2015 and $1,588 for the three months ended April 2, 2016 for new awards intended to be granted under the 2016 Incentive Award Plan in connection with this offering.

 

(c)  

Represents restructuring expenses associated with a plan to no longer sell a diagnostic ultrasound product, including employee severance. Additionally, this includes a provision for inventory related to this product of $1,183 and $202 in 2014 and 2015, respectively, which is included

 

 

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in cost of sales. Also included are restructuring and relocation costs of certain U.S. finance functions and headcount reductions in our international business to improve operating efficiency.

 

(d)   Represents expense related to changes in the fair value of contingent consideration related to the OsteoAMP acquisition.

 

(e)   Represents expenses related to the transition of Bioventus LLC to become a separate entity as a result of the divestiture from Smith & Nephew, such as product rebranding, legal fees and consulting expenses.

 

(f)   Represents expenses associated with Bioventus LLC preparing to become a public company, primarily accounting and legal fees.

 

(g)   Represents 2013 severance costs related to headcount reductions as a result of the divestiture from Smith & Nephew.

 

(h)   Represents non-cash expense recorded in cost of sales for OsteoAMP and BioStructures inventory subject to valuation step-up as a result of purchase accounting.

 

(i)   Represents initial expense paid to Pfizer to acquire certain rights related to our next-generation BMP product candidates.

 

(4)   Adjusted EBITDA is burdened by BMP program costs of $650, $6,682, and $11,309 for the years ended December 31, 2013, 2014, and 2015, respectively, and $2,491 and $2,535 for the three months ended March 28, 2015 and April 2, 2016, respectively.

 

(5)   Gives pro forma effect to the Acquisition, but not the Transactions. The pro forma effect of the Transactions would reduce Adjusted EBITDA by the amount of the results of operations attributable to the non-controlling interests for the applicable period.

 

 

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Risk factors

Investing in our Class A common stock involves a high degree of risk. These risks include, but are not limited to, those described below, each of which may be relevant to an investment decision. You should carefully consider the risks described below, together with all of the other information in this prospectus, including our financial statements and related notes, before investing in our Class A common stock. The realization of any of these risks could have a significant adverse effect on our reputation, business, including our financial condition, results of operations and growth, which we refer to collectively in this section as our business, and ability to accomplish our strategic objectives. In that event, the trading price of our Class A common stock could decline, and you may lose part or all of your investment.

Risks related to our business

We are highly dependent on a limited number of products.

Our Exogen system and Supartz FX accounted for 89%, 87%, 83%, 85% and 77% of our total revenue for the years ended December 31, 2013, 2014 and 2015 and the three months ended March 28, 2015 and April 2, 2016, respectively. We expect that sales of our Active Healing Therapies products will continue to account for a majority of our revenue while we continue to expand and develop our product offerings for our Surgical business. Therefore, our ability to execute our growth strategy and become profitable will depend upon the continued demand for these products. In addition, the term of our distribution agreement for Supartz FX ends in May 2019. If our distribution agreement for Supartz FX is terminated, our revenue may be impaired if we are unable to introduce a product that effectively replaces or improves upon Supartz FX. If our Exogen system or Supartz FX fail to maintain their market acceptance for any reason, or if we do not renew our distribution agreement with respect to Supartz FX on commercially reasonable terms or at all, our business, results of operations and financial condition may be adversely affected.

We may be unable to launch and successfully commercialize GelSyn-3.

We plan to launch GelSyn-3, a three injection HA viscosupplementation therapy, in the United States during the second half of 2016. Even if we are able to launch GelSyn-3, the commercial success of GelSyn-3 will depend upon the awareness and acceptance of GelSyn-3 among the medical community, including physicians and patients. Market acceptance will depend on a number of factors, including, among others:

 

 

the perceived advantages and disadvantages of GelSyn-3 over existing HA viscosupplementation therapies and other competitive treatments for knee osteoarthritis;

 

 

availability of alternative treatments;

 

 

the extent to which physicians prescribe GelSyn-3;

 

 

the willingness of the target patient population to try new therapies;

 

 

the strength of marketing and distribution support and timing of market introduction of GelSyn-3 and competitive products;

 

 

publicity concerning GelSyn-3, our existing products or competing products and treatments;

 

 

pricing and cost effectiveness of GelSyn-3;

 

 

the effectiveness of our sales and marketing strategies; and

 

 

the willingness of patients to pay out-of-pocket in the absence of third party reimbursement.

 

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Our efforts to educate the medical community about the benefits of GelSyn-3 may require significant resources and we may never be successful. In addition, we may be ineffective at marketing GelSyn-3 to existing patients and customers in such a manner that would effectively replace any loss of revenue associated with any discontinuance of our distribution agreement for Supartz FX. If GelSyn-3 does not achieve an adequate level of acceptance by patients and physicians, our net sales may be adversely affected.

Our commercial success depends on our ability to differentiate the HA viscosupplementation therapies that we own or distribute from alternative therapies for the treatment of osteoarthritis.

Our ability to achieve commercial success will, at least in part, depend on our ability to differentiate the HA viscosupplementation therapies that we own or distribute in such a way that physicians and patients will select them. The HA viscosupplementation therapies that we own or distribute could face competition from steroid injections, single injection HA viscosupplementation therapies and a number of combination HA viscosupplementation/steroid therapies currently in development.

We expect that the HA viscosupplementation therapies that we own or distribute will continue to be used primarily after simple analgesics and steroid injections no longer provide adequate pain relief. In addition, the five and three injection HA viscosupplementation therapies that we distribute or plan to distribute face competition from single injection therapies. Due to the convenience associated with the single injection treatments, it is expected that these products will capture increasing market share of the HA viscosupplementation therapies market, which may adversely affect our business, results of operations and financial condition. There are also a number of combination HA viscosupplementation/steroid therapies currently in development. The American Association of Orthopedic Surgeons, since the release of their 2013 clinical practice guidelines, does not recommend the use of HA for patients with symptomatic knee osteoarthritis because clinical studies have reached inconsistent results on its efficacy. To the extent that any therapies receive approval or alternative therapies receive positive support from the American Association of Orthopedic Surgeons or other physicians, they could reduce the market share represented by HA viscosupplementation therapies for osteoarthritis treatment and adversely affect our commercial success.

If we are unable to differentiate the HA viscosupplementation therapies we own or distribute from other therapies, physicians and patients may not be willing to use them or be willing to switch from existing therapies with which they are familiar. Once physicians incorporate a particular treatment into their practice they may not alter their practice absent compelling clinical evidence of safety and/or effectiveness and/or significant pricing reimbursement advantages.

We compete and may compete in the future against other companies, some of which have longer operating histories, more established products or greater resources than we do, which may prevent us from achieving increased market penetration or improved operating results.

The medical technology industries are characterized by intense competition, subject to rapid change and significantly affected by market activities of industry participants, new product introductions and other technological advancements. We believe that our competitors have historically dedicated and will continue to dedicate significant resources to promote their products or to develop new products for orthobiologics. We have competitors in the United States and internationally, including major medical device and pharmaceutical companies, biotechnology companies and universities and other research institutions.

These companies and other industry participants may develop alternative treatments, products or procedures that compete directly or indirectly with our products. If alternative treatments are, or are perceived to be, superior to our products, sales of our products could be negatively affected and our results of operations could suffer. Our competitors may also develop and patent processes or products earlier than we can or obtain

 

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regulatory clearance or approvals for competing products more rapidly than we can, which could impair our ability to develop and commercialize similar processes or products.

Many of our current and potential competitors are major medical device and pharmaceutical companies that have substantially greater financial, technical and marketing resources than we do, and they may succeed in developing products that would render our products obsolete or noncompetitive. It is also possible that our competition will be able to leverage their large market share to set prices at a level below that which is profitable for us.

Some of our competitors enjoy several competitive advantages over us, including:

 

 

greater financial, human and other resources for product R&D, sales and marketing and litigation;

 

 

significantly greater name recognition;

 

 

control of intellectual property and more expansive portfolios of intellectual property rights, which could impact future products under development;

 

 

greater experience in obtaining and maintaining regulatory clearances or approvals for products and product enhancements;

 

 

established relationships with hospitals and other healthcare providers, physicians, suppliers, customers and third-party payors;

 

 

additional lines of products, and the ability to bundle products to offer greater incentives to gain a competitive advantage; and

 

 

more established sales, marketing and worldwide distribution networks.

The potential introduction by competitors of products that compete with our existing or planned products may also make it difficult to market or sell our products. In addition, the entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in the market generally.

As a result, our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate coverage and reimbursement from third-party payors, and are safer, less invasive and more effective than alternatives available for similar purposes. If we are unable to do so, our sales or margins could decrease, which would adversely affect our business.

If clinical trials of our next-generation BMP product candidates fail to satisfactorily demonstrate safety and efficacy or we are unable to obtain regulatory approval for, or successfully commercialize our next-generation BMP product candidates, our future growth prospects could be adversely affected.

Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We expect to commence a Phase 1 clinical trial of one of our next-generation BMP product candidates within 18 months. Over the next several years, we expect to increase our R&D expenses significantly for our next-generation BMP product candidates as we undergo clinical trials to demonstrate the safety and efficacy of our product candidates in order to gain regulatory approvals. Such increased R&D expenses on our next-generation BMP product candidates could potentially be multiples of our current R&D expenses on the BMP product candidates. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. Our pre-clinical data are based on animal models, including non-human primate studies, which may not be indicative of results that we will experience in clinical trials with human subjects. The clinical development of our next-generation BMP product candidates is susceptible to the risk of failure inherent at any stage of product development, including failure to demonstrate

 

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efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. Our failure to successfully complete clinical trials of any of our next-generation BMP product candidates and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any of our next-generation BMP product candidates could adversely affect our future growth prospects.

Our long-term growth depends on our ability to develop, acquire and commercialize additional orthobiologic products.

Our industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our business that we continue to enhance our product offerings and introduce new products. Developing, acquiring and commercializing products is expensive, time-consuming and could divert management’s attention away from our existing orthobiologics business. Even if we are successful in developing additional products, the success of any new product offering or enhancements to existing products will depend on several factors, including our ability to:

 

 

properly identify and anticipate the needs of healthcare professionals and patients;

 

 

develop and introduce new products or product enhancements in a timely manner;

 

 

distinguish our products from those of our competitors;

 

 

avoid infringing upon the intellectual property rights of third-parties and maintain necessary intellectual property licenses from third-parties;

 

 

demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials;

 

 

obtain clearance or approval, if required, from the FDA and other regulatory agencies, for such new products or enhancements to existing products, and maintain full compliance with FDA and other regulatory requirements applicable to new devices or products or modifications of existing devices or products;

 

 

provide adequate training to potential users of our products;

 

 

receive adequate coverage and reimbursement for our products; and

 

 

maintain an effective and dedicated sales and marketing team.

If we are unsuccessful in developing, acquiring and commercializing new products, our ability to increase our net sales may be impaired.

Our Surgical business depends on the continued and future acceptance of our bone graft substitutes by the medical community.

New allograft, DBMs, synthetics, BMPs/growth factors, or other enhancements to our existing implants may never achieve broad market acceptance, which can be affected by numerous factors, including lack of clinical acceptance of bone graft substitutes and technologies, introduction of competitive treatment options which render bone graft substitutes and technologies too expensive or obsolete and difficulty training surgeons in the use of bone graft substitutes and technologies.

Market acceptance will also depend on our ability to demonstrate that our existing and new bone graft substitutes and technologies are an attractive alternative to existing treatment options. Our ability to do so will depend on surgeons’ evaluations of the clinical safety, efficacy, ease of use, reliability and cost-effectiveness of

 

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these treatment options and technologies. For example, we believe that some in the medical community have lingering concerns over the risk of disease transmission through the use of allografts.

Media reports or other negative publicity concerning both methods of tissue recovery from donors and actual or potential disease transmission from donated tissue may limit widespread acceptance by the medical community of our allografts, BMPs/growth factor and DBMs, whether directed at these products generally or our products specifically. Unfavorable reports of improper or illegal tissue recovery practices by any participant in the industry, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft based technologies by the medical community.

Furthermore, we believe that even if the medical community generally accepts our bone graft substitutes and technologies, acceptance and recommendations by influential members of the medical community will be important to their broad commercial success. If our bone graft substitutes and technologies are not broadly accepted by the medical community, we may not remain competitive in the market.

Our future growth depends on physician awareness of the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products.

We focus our sales, marketing and training efforts on physicians, surgeons and other health care professionals. The acceptance of our products depends in part on our ability to educate physicians as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products compared to alternative products, procedures and therapies. We support our sales force and distributors through in-person educational programs and an online medical education platform, among other things. We also produce marketing materials, including materials outlining our products, for our sales and marketing team in a variety of languages using printed, video and multimedia formats. However, we may not be successful in our efforts to educate physicians and surgeons. If physicians or surgeons are not properly trained, they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. In addition, a failure to educate physicians or surgeons regarding our products may impair our ability to achieve market acceptance of our products.

We have incurred significant net losses since inception, and we may not be able to achieve or sustain profitability.

We have incurred net losses since our inception. For the years ended December 31, 2013, 2014 and 2015 and the three months ended March 28, 2015 and April 2, 2016, we had net losses of $22.4 million, $12.9 million, $34.1 million, $21.0 million and $6.0 million, respectively. As a result of ongoing losses, we had an accumulated deficit of $91.8 million and $98.0 million as of December 31, 2015 and April 2, 2016, respectively. Our ability to generate sufficient net sales from our existing products or from any of our products in development or products that we acquire, in order to transition to profitability, is uncertain. Following this offering, we expect that our operating expenses will continue to increase as we continue to develop, enhance and commercialize new products and incur additional operational costs associated with being a public company, such that we may never achieve profitability. Furthermore, even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis. If we do not achieve profitability, it will be more difficult for us to finance our business and accomplish our strategic objectives.

Pricing pressure from our competitors or hospitals may affect our ability to sell our products at prices necessary to support our current business strategies.

Medical technology companies, healthcare systems and group purchasing organizations have intensified competitive pricing pressure as a result of industry trends and new technologies. Purchasing decisions are

 

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gradually shifting to hospitals, integrated delivery networks and other hospital groups, with surgeons and other physicians increasingly acting only as “employees.” Because hospitals that typically bill various third-party payors generally purchase our Surgical products, changes in the purchasing behavior of such hospitals or the amount such payors are willing to reimburse our customers for procedures using our products, including those as a result of healthcare reform initiatives, could create additional pricing pressure on us. In addition to these competitive forces, we continue to see pricing pressure as hospitals introduce new pricing structures into their contracts and agreements, including fixed price formulas, capitated pricing and episodic or bundled payments intended to contain healthcare costs. If such trends continue to drive down the prices we are able to charge for our products, our profit margins will shrink, adversely affecting our ability to invest in and grow our business.

Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators, regulators and third-party payors. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests for pricing concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single accounts may continue to use their market power to consolidate purchasing decisions for physicians. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices of our products.

If we are unable to achieve and maintain adequate levels of coverage and/or reimbursement for the procedures using our products, or any future products we may seek to commercialize, their commercial success may be severely hindered.

Our products, except our Exogen system, are purchased by healthcare providers and customers who typically bill third-party payors, such as government programs, including Medicare and Medicaid, or private insurance plans and healthcare networks, to cover all or a portion of the costs and fees associated with our products. These third-party payors may in turn bill patients for any deductibles or co-payments. For our Exogen system, we typically bill third-party payors and collect co-payments from patients. These third-party payors and insurers may deny reimbursement if they determine that a device or product provided to a patient or used in a procedure does not meet applicable payment criteria or if the policyholder’s healthcare insurance benefits are limited.

Limits put on reimbursement by third-party payors, whether foreign or domestic, governmental or commercial, could make it more difficult to buy our products and substantially reduce, or possibly eliminate, patient access to our products. The healthcare industry in the United States has experienced a trend toward cost containment as government and private insurers seek to control rising healthcare costs by imposing lower payment rates and negotiating reduced contract rates with providers. In addition, there is no uniform policy of coverage and reimbursement for our products or procedures using our products among third-party payors in the United States, and coverage and reimbursement for our products and procedures using our products can differ significantly from payor to payor. Payors regularly review new and existing technologies for possible coverage and can, without notice, deny or reverse coverage for new or existing products and treatments. We may also be required to conduct expensive clinical studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. In addition, should governmental authorities continue to enact legislation or adopt regulations that affect third-party coverage and reimbursement, access to our products and coverage by private or public insurers may be reduced. If third-party payors or insurers that currently cover or reimburse our products or the procedures in which they are used limit their coverage or reimbursement in the future, or if other third-party payors or insurers issue similar policies, this could impact our ability to sell our products, force us to lower the price we charge for our products, and adversely affect our business, results of operations and financial condition.

 

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Our ability to market and sell our products could be harmed by future actions by the Centers for Medicare and Medicaid Services, or CMS (which administers the Medicare program), other government agencies or private payors to diminish payments to healthcare providers. Private payors may adopt coverage decisions and payment amounts determined by CMS as guidelines in setting their coverage and reimbursement policies. In addition, for some governmental programs, such as Medicaid, coverage and reimbursement differs from state to state. Medicaid payments to physicians, facilities and other providers are often lower than payments by other third-party payors and some state Medicaid programs may not pay an adequate amount for the procedures performed with our products, if any payment is made at all. If CMS, other government agencies or private payors lower their reimbursement rates, the commercial success of our products may be severely hindered.

Our ability to maintain our competitive position depends on our ability to attract, retain and motivate our senior management team and highly qualified personnel, and our failure to do so could have an adverse effect on our results of operations.

We believe that our continued success depends to a significant extent upon the skill, experience and performance of members of our senior management team, who have been critical to the management of our operations and implementation of our strategy, as well as our ability to continue to attract, retain and motivate additional executive officers, and other key employees and consultants, such as those individuals who are engaged in our R&D efforts. The replacement of any of our key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and could therefore have an adverse impact on our business. In addition, we do not carry any “key person” insurance policies that could offset potential loss of service under applicable circumstances.

Competition for experienced employees in the medical technology industry can be intense. To attract, retain and motivate qualified employees, we plan to utilize stock-based incentive awards such as employee stock options. If the value of such stock awards does not appreciate as measured by the performance of the price of our Class A common stock and ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate our employees could be adversely impacted, which could negatively affect our results of operations and/or require us to increase the amount we expend on cash and other forms of compensation.

Governments outside the United States may not provide coverage or reimbursement of our products, which may adversely affect our net sales.

Acceptance of our products in international markets may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. Our products may not obtain international coverage and reimbursement approvals in a timely manner, if at all, which may require consumers desiring our product to purchase them directly. Third-party coverage and reimbursement for our products or any of our products in development for which we may receive regulatory approval may not be available or adequate in international markets, which could have an adverse impact on our business.

We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.

Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of our products. This risk exists even if a product is cleared or approved for commercial sale by the FDA and manufactured in facilities regulated by the FDA or an applicable foreign regulatory authority. Our products are designed to affect, and any future products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our

 

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products in development could result in patient injury or death. The medical technology industry has historically been subject to extensive litigation over product liability claims, and we cannot assure you that we will not face product liability suits. We may be subject to product liability claims if our products or products in development cause, or merely appear to have caused, patient injury or death, even if such injury or death was as a result of supplies or components that are produced by third-party suppliers. Product liability claims may be brought against us by consumers, healthcare providers or others selling or otherwise coming into contact with our products, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

 

costs of litigation;

 

distraction of management’s attention from our primary business;

 

the inability to commercialize existing or new products;

 

decreased demand for our products or, if cleared or approved, products in development;

 

damage to our business reputation;

 

product recalls or withdrawals from the market;

 

withdrawal of clinical trial participants;

 

substantial monetary awards to patients or other claimants; and

 

loss of net sales.

While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. We cannot assure you that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for product safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have an adverse impact on our business.

In addition, although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have an adverse impact on our business.

Fluctuations in the demand for our products or our inability to forecast demand accurately may influence the ability of our suppliers to meet our delivery needs or result in excess product inventory.

We are required by some of our contracts with suppliers of our products to forecast future product demand or meet minimum purchase requirements. Our distribution agreement for Supartz FX is subject to certain annual minimum purchase requirements based on a percentage of our Supartz FX annual forecast and our supply agreement for Durolane is subject to a minimum order volume for each order and purchase amounts are also based in part on forecasts. We will also be subject to certain annual minimum purchase requirements for GelSyn-3 and purchase amounts will be based on rolling forecasts. Our forecasts are based on multiple assumptions of product and market demand, which may cause our estimates to be inaccurate. If we underestimate demand, we may not have adequate supplies and could have reduced control over pricing, availability and delivery schedules with our suppliers, which could prevent us from meeting increased customer

 

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or consumer demand and harm our business. However, if we overestimate our demand, we may have underutilized assets and may experience reduced margins. If we do not accurately align our supplies with demand, our business, financial condition and results of operations may be adversely affected.

We may face issues with respect to the supply of our products or their components, including increased costs, disruptions of supply, shortages, contaminations or mislabeling.

We are dependent on a limited number of suppliers for the supply of products and components used in the manufacturing process of our products. Our top three suppliers provide us with products and components that constituted 46%, 44% and 48% of our total net sales for the years ended December 31, 2013, 2014 and 2015, respectively. For the three month periods ended March 28, 2015 and April 2, 2016, our top two suppliers provide us with products and components that constitute 42% and 38%, respectively, of our total net sales. Our Exogen system undergoes final assembly with components procured from various suppliers, including a transducer, which is a key component that is supplied by a single source supplier. GelSyn-3, Supartz FX and Durolane are supplied by single-source third-party manufacturers. We also have a supply agreement with Advanced Biologics LLC, or Advanced Biologics, through October 2018 to purchase our OsteoAMP product. We may not be able to renew or enter into new contracts with our existing suppliers following the expiration of such contracts on commercially reasonable terms, or at all.

In particular, the success of our Surgical business, which, among other things, markets and develops tissue-based bone biologic product will depend on our suppliers continuing to have access to donated human cadaveric tissue, as well as the maintenance of high standards in their processing methodology. The supply of such donors can fluctuate over time. We cannot be certain that our current suppliers who rely on allograft bone tissue, plus any additional sources that our suppliers identify in the future, will be sufficient to meet our product needs. Our dependence on a limited number of third-party suppliers and the challenges that they may face in obtaining adequate supplies of allograft bone tissue involve several risks, including limited control over pricing, availability, quality and delivery schedules. We may be unable to find an alternative supplier in a reasonable time period or on commercially reasonable terms, if at all, which would have a material adverse effect on our business, results of operations and financial condition.

If any of our products or the components used in our products are alleged or proven to include quality or product defects, including as a result of improper methods of tissue recovery from donors and disease transmission from donated tissue or illegal harvesting, we may need to find alternate supplies, delay production of our products, discard or otherwise dispose of our products, or engage in a product recall, all of which may have a materially adverse effect on our business, financial condition and results of operations. If our products or the components in our products are affected by adverse prices or quality or other concerns, we may not be able to identify alternate sources of components or other supplies that meet our quality controls and standards to sustain our sales volumes or on commercially reasonable terms, or at all.

We rely on a limited number of third-party manufacturers to manufacture certain of our products.

We have developed in-house assembly capabilities for our Exogen system. Exogen components, Supartz FX, GelSyn-3, Durolane and our Surgical products are generally manufactured by third-party manufacturers. We and our third-party manufacturers are required to comply with the Quality System Regulation, or QSR, which is a set of FDA regulations that establishes current Good Manufacturing Practices, or cGMP, requirements for medical devices and covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of such devices. There are a limited number of suppliers and third-party manufacturers that operate under FDA’s QSR requirements and that have the necessary expertise and capacity to manufacture our products or components for our products. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs, and our anticipated growth

 

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could strain the ability of our current suppliers and third-party manufacturers to deliver products, materials and components to us. Upon expiration of our existing agreements with these third-party manufacturers, we may not be able to renegotiate the terms of our agreements with these third-party manufacturers on a commercially reasonable basis, or at all.

If we or our third-party manufacturers fail to maintain facilities in accordance with the FDA’s QSR, the noncomplying party could lose the ability to manufacture our products on a commercial scale. Loss of this manufacturing capability would limit our ability to sell our products, including Supartz FX, Durolane and our Surgical products, which are manufactured by single-source third-party manufacturers. See “Business—Manufacturing and supply.”

The manufacture of our products may not be easily transferable to other sites in the event that any of our third-party manufacturers experience breakdown, failure or substandard performance of equipment, disruption of supply or shortages of, or quality issues with, components of our products and other supplies, labor problems, power outages, adverse weather conditions and natural disasters or the need to comply with environmental and other directives of governmental agencies. From time to time, a third-party manufacturer may experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of finished goods or require that we incur additional expense by providing financial accommodations to the third-party manufacturer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new third-party manufacturing arrangement with another provider. The loss of any of these third-party manufacturers or the failure for any reason of any of these third-party manufacturers to fulfill their obligations under their agreements with us, including a failure to meet our quality controls and standards, may result in disruptions to our supply of finished goods. We may be unable to locate an additional or alternate third-party manufacturing arrangement that meets our quality controls and standards in a timely manner or on commercially reasonable terms, if at all. If this occurs, our business, financial condition and results of operations will be adversely affected.

If our facilities are damaged or become inoperable, we will be unable to continue to research, develop and manufacture our products and, as a result, there will be an adverse impact on our business until we are able to secure a new facility.

We do not have redundant facilities for the final assembly of our Exogen system. Our other facilities and equipment would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, tornadoes, flooding, fire and power outages, which may render it difficult or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited inventory of supplies, components and finished product, may result in the inability to continue manufacturing or supplying our products during such periods and the loss of customers or harm to our reputation. Although we possess insurance for damage to our facilities and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.

If we fail to maintain our numerous contractual relationships, our business, financial condition or results of operations could be adversely affected.

We are party to numerous contracts in the normal course of our business, including our distribution agreement for Supartz FX which has a current term expiring in May 2019. We have contractual relationships with suppliers, distributors and agents, as well as service providers. In the aggregate, these contractual relationships are necessary for us to operate our business. From time to time, we amend, terminate or negotiate our contracts. We may also periodically be subject to, or make claims of breach of contract, or threaten legal action relating to

 

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our contracts. These actions may result in litigation. At any one time, we have a number of negotiations under way for new or amended commercial agreements. We devote substantial time, effort and expense to the administration and negotiation of contracts involved in our business. However, these contracts may not continue in effect past their current term or we may not be able to negotiate satisfactory contracts in the future with current or new business partners, which may adversely affect our business, financial condition or results of operations.

If we are unable to manage, maintain and expand our network of direct sales representatives and independent distributors, we may not be able to generate anticipated sales.

Our operating results are directly dependent upon the sales and marketing efforts of not only our direct sales representatives, but also our independent distributors. If our direct sales representatives or independent distributors fail to adequately promote, market and sell our products, our sales could significantly decrease.

We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. If any of our direct sales representatives were to leave us, or if any of our independent distributors were to cease to do business with us, our sales could be adversely affected. In such a situation, we may need to seek alternative independent distributors or increase our reliance on our direct sales representatives, which may not prevent our sales from being adversely affected. If a direct sales representative or independent distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. Because of the competition for their services, we may be unable to recruit or retain additional qualified independent distributors or to hire additional direct sales representatives to work with us on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified direct sales representatives or independent distributors would prevent us from maintaining or expanding our business and generating sales.

If we launch new products or increase our marketing efforts with respect to existing products, we will need to expand the reach of our marketing and sales networks. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled direct sales representatives and independent distributors with significant technical knowledge in orthobiologics. New hires require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintain or increase our sales.

If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.

If we choose to acquire or invest in new businesses, products or technologies, we may be unable to complete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.

Our success depends on our ability to enhance and broaden our product offerings in response to changing customer demands, competitive pressures and advances in technologies. In November 2015, we acquired BioStructures, a proprietary developer and marketer of bioresorbable bone graft products for a broad range of spinal and orthopedic surgical applications. We continue to search for viable acquisition candidates or strategic alliances that would expand our market sector or global presence, as well as additional products appropriate for current distribution channels. Accordingly, we may in the future pursue the acquisition of, or joint ventures relating to, new businesses, products or technologies instead of developing them ourselves. Potential and completed acquisitions and strategic investments involve numerous risks, including:

 

 

risks associated with conducting due diligence;

 

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problems integrating the purchased technologies, products or business operations;

 

 

inability to achieve the anticipated synergies and overpaying for acquisitions or unanticipated costs associated with acquisitions;

 

 

invalid net sales assumptions for potential acquisitions;

 

 

issues maintaining uniform standards, procedures, controls and policies;

 

 

diversion of management’s attention from our core business;

 

 

adverse effects on existing business relationships with suppliers, distributors and customers;

 

 

risks associated with entering new markets in which we have limited or no experience;

 

 

potential loss of key employees of acquired businesses; and

 

 

increased legal, accounting and compliance costs.

We compete with other companies for these opportunities, and we may be unable to consummate such acquisitions or joint ventures on commercially reasonable terms, or at all. In addition, acquired businesses may have ongoing or potential liabilities, legal claims (including tort and/or personal injury claims) or adverse operating issues that we fail to discover through due diligence prior to the acquisition. Even if we are aware of such liabilities, claims or issues, we may not be able to accurately estimate the magnitude of the related liabilities and damages. In particular, to the extent that prior owners of any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, failed to fulfill their contractual obligations to their customers, or failed to satisfy legal obligations to employees or third parties, we, as the successor, may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairment in the future that could harm our financial results. If we were to issue additional equity in connection with such acquisitions, this may dilute our stockholders.

Actual or attempted breaches of security, unauthorized disclosure of information, denial of service attacks or the perception that personal and/or other sensitive or confidential information in our possession is not secure, could result in a material loss of business, substantial legal liability or significant harm to our reputation.

We receive, collect, process, use and store a large amount of information, including personally identifiable, protected health and other sensitive and confidential information. This data is often accessed by us through transmissions over public and private networks, including the Internet. The secure transmission of such information over the Internet and other mechanisms is essential to maintain confidence in our IT systems. Despite the privacy and security measures we have in place to ensure compliance with applicable laws, regulations and contractual requirements, our facilities and systems, and those of our third-party vendors and service providers, are vulnerable to privacy and security incidents including, but not limited to, computer hacking, breaches, acts of vandalism or theft, computer viruses or other forms of cyber-attack, misplaced or lost data, programming and/or human errors or other similar events. A party, whether internal or external, that is able to circumvent our security systems could, among other things, misappropriate or misuse sensitive or confidential information, user information or other proprietary information, or cause significant interruptions in our operations. Internal or external parties may attempt to circumvent our security systems, and we expect that we may in the future experience external attacks on our network, such as, for example, reconnaissance probes, denial of service attempts, malicious software attacks and phishing attacks.

Because the techniques used to circumvent security systems can be highly sophisticated and change frequently, often are not recognized until launched against a target and may originate from less regulated and remote

 

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areas around the world, we may be unable to proactively address all possible techniques or implement adequate preventive measures for all situations. Recent, well-publicized attacks on prominent companies have resulted in the theft of significant amounts of sensitive and personal information and demonstrate the sophistication of the perpetrators and magnitude of the threat posed to companies across the nation, including the health care industry.

If someone is able to circumvent or breach our security systems, they could steal any information located therein or cause interruptions to our operations. Security breaches or attempts thereof could also damage our reputation and expose us to a risk of monetary loss and/or litigation, fines and sanctions. We also face risks associated with security breaches affecting third parties that conduct business with us or our customers and others who interact with our data. While we maintain insurance that covers certain security and privacy breaches, we may not carry appropriate insurance or maintain sufficient coverage to compensate for all potential liability.

We are subject to diverse laws and regulations relating to data privacy and security, including the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the EU Data Protection Directive (95/46/EC). Complying with these numerous and complex regulations is expensive and difficult, and failure to comply with any privacy laws or data security laws or any security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information, whether by us, one of our business associates or another third-party, could have a material adverse effect on our business, reputation, financial condition and results of operations, including but not limited to: material fines and penalties; compensatory, special, punitive, and statutory damages; litigation; consent orders regarding our privacy and security practices; requirements that we provide notices, credit monitoring services and/or credit restoration services or other relevant services to impacted individuals; adverse actions against our licenses to do business; and injunctive relief. Furthermore, these rules are constantly changing; for example, the US-EU Safe Harbor framework has been declared invalid and other methods to permit transfer are now under review. Additionally, the costs incurred to remediate any data security or privacy incident could be substantial.

We cannot assure you that any of our third-party service providers with access to our or our customers and/or employees’ personally identifiable and other sensitive or confidential information will maintain appropriate policies and practices regarding data privacy and security in compliance with all applicable laws or that they will not experience data security breaches or attempts thereof, which could have a corresponding effect on our business. While we attempt to address the associated risks by requiring all such third-party providers with data access to sign agreements, including business associate agreements, if necessary, obligating them to take security measures to protect such data, we cannot assure you that these contractual measures and our own privacy and security-related safeguards will protect us from the risks associated with the third-party storage and transmission of such information.

Failure of a key information technology and communication system, process or site could adversely affect our business.

We rely extensively on information technology and communication systems and software and hardware products, including those of external providers to conduct business. These systems and software and hardware impact, among other things, ordering and managing components of our products from suppliers, shipping products to customers on a timely basis, processing transactions, coordinating our sales activities across all of our products, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, data security and other processes necessary to manage our business.

Despite any precautions we may take, our systems and software and hardware could be exposed to damage or interruption from circumstances beyond our control, such as fire, natural disasters, systems failures, power

 

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outages, cyber-attacks, terrorism, energy loss, telecommunications failure, security breaches and attempts thereof, computer viruses and similar disruptions affecting the global Internet. Although we have taken steps to prevent system failures and have back-up systems and procedures to prevent or reduce disruptions, such steps may not prevent an interruption of services and our disaster recovery planning may not be adequate or account for all contingencies. Additionally, our insurance may not adequately compensate us for all losses or failures that may occur. If our systems or software and hardware are damaged or cease to function properly and our business continuity plans do not effectively compensate on a timely basis, we may suffer interruptions in our operations, which could adversely affect our business.

We will need to improve and upgrade our systems and infrastructure as our operations grow in scale in order to maintain the reliability and integrity of our systems and infrastructure. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase. Any service outages or delays due to the installation of any new or upgraded technology (and customer issues therewith), or the impact on the reliability of our data from any new or upgraded technology could adversely affect our cash flows, operating results and financial condition.

Our business subjects us to economic, political, regulatory and other risks associated with international sales and operations that could materially adversely affect our business, financial condition or results of operations.

Since we sell our products in many different jurisdictions outside the United States, our business is subject to risks associated with conducting business internationally. We anticipate that net sales from international operations will continue to represent a portion of our total net sales. In addition, a number of our third-party manufacturing facilities and suppliers of our products are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:

 

 

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

 

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

 

customers in some foreign countries potentially having longer payment cycles;

 

 

disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act, or FCPA, regulations of the U.S. Office of Foreign Assets Controls, and U.S. anti-money laundering regulations, as well as exposure of our foreign operations to liability under these regulatory regimes;

 

 

training of third-parties on our products and the procedures in which they are used;

 

 

reduced protection for and greater difficulty enforcing our intellectual property rights;

 

 

unexpected changes in tariffs, trade barriers and regulatory requirements, export licensing requirements or other restrictive actions by foreign governments;

 

 

difficulty in staffing and managing widespread operations, including compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

 

foreign taxes, including withholding of payroll taxes;

 

 

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

 

international regulators and third-party payors requiring additional clinical studies prior to approving or allowing reimbursement for our products;

 

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complexities associated with managing multiple payor reimbursement regimes, government payors or patient self-pay systems;

 

 

production shortages resulting from any events affecting material supply or manufacturing capabilities abroad; and

 

 

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

In addition, further expansion into new international markets may require significant resources and the efforts and attention of our management and other personnel, which may divert resources from our existing business operations. As we expand our business internationally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our operations outside of the United States.

Failure to comply with the FCPA and laws associated with our activities outside the United States could adversely affect our business, financial condition or results of operations.

We are subject to the FCPA and other anti-bribery legislation around the world. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made. As we conduct our business in jurisdictions outside of the United States, we face significant risks if we fail to comply with the FCPA and other laws that prohibit improper payments, offers or promises of payment to foreign governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business or other advantages. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. Although we have implemented a company policy requiring our employees and consultants to comply with the FCPA and similar laws, such policy may not be effective at preventing all potential FCPA or other violations. Although our agreements with our international distributors clearly state our expectations for our distributors’ compliance with U.S. laws, including the FCPA, and provide us with various remedies upon any non-compliance, including the ability to terminate the agreement, we also cannot guarantee our distributors’ compliance with U.S. laws, including the FCPA. Therefore there can be no assurance that none of our employees and agents, or those companies to which we outsource certain of our business operations, have not and will not take actions that violate our policies or applicable laws, for which we may be ultimately held responsible. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could have a material and adverse effect on our business, financial condition or results of operations.

Furthermore, we are subject to the export controls and economic embargo rules and regulations of the United States, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce. These regulations limit our ability to market, sell, distribute or otherwise transfer our products or technology to prohibited countries or persons. A determination that we have failed to comply, whether knowingly or inadvertently, may result in substantial penalties, including fines, enforcement actions, civil and/or criminal sanctions, the disgorgement of profits, the imposition of a court-appointed monitor, as well as the denial of export privileges, and may have an adverse effect on our business, financial condition or results of operations.

 

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We are exposed to foreign currency risks, which may materially adversely affect our business, financial condition or results of operations.

Our financial statements are presented in U.S. dollars. Because some of our revenue, expenses, assets and liabilities are denominated in foreign currencies, we are subject to exchange rate and currency risks. In preparing our financial statements, we must convert all non-U.S. dollar financial results to U.S. dollars at varying exchange rates. This may ultimately result in currency gain or loss, the outcome of which we cannot predict. Furthermore, to the extent that we incur expenses or earn revenue in currencies other than in U.S. dollars, any change in the values of those foreign currencies relative to the U.S. dollar could cause our profits to decrease or our products to be less competitive against those of our competitors. To the extent that our current assets denominated in foreign currency are greater or less than our current liabilities denominated in foreign currencies, we face potential foreign exchange exposure.

To minimize such exposures, we have entered, and may in the future enter, into derivative instruments related to forecasted foreign currency transactions or currency hedges from time to time. Losses from changes in the value of the Euro or other foreign currencies relative to the U.S. dollar could materially affect our business, financial condition or results of operations.

We are subject to differing tax rates in several jurisdictions in which we operate, which may adversely affect our results of operations.

We have subsidiaries in several countries. Our business outside of the United States is conducted primarily through a subsidiary in the Netherlands. Income taxes in the Netherlands are imposed on a negotiated percentage of sales. We have an agreement with the Dutch taxing authorities that is subject to renewal every five years where our subsidiary in the Netherlands will incur, but not have to pay income taxes in years when the subsidiary is operating at a loss. As a result, based on the net sales for the year ended December 31, 2013, we recorded a deferred tax liability of about $0.3 million which is still outstanding at December 31, 2015. If our tax treatment were to change, we may be subject to additional tax liability or penalty, which could adversely affect our profitability.

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our Class A common stock.

 

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Our credit agreements contain financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in our credit agreements, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.

As of April 2, 2016, we had outstanding indebtedness of $19.5 million under our revolving credit facility (leaving availability of $20.5 million) and $159.9 million under our term loan facilities (net of unamortized original issue discount and deferred financing costs). Our secured credit facilities contain certain covenants, including, but not limited to:

 

 

a minimum fixed charge ratio and a maximum debt leverage ratio requirement as defined in the credit agreements;

 

 

restrictions on the declaration or payment of certain distributions on or in respect of our equity interests;

 

 

restrictions on acquisitions, investments and certain other payments;

 

 

limitations on the incurrence of new indebtedness;

 

 

limitations on transfers, sales and other dispositions; and

 

 

limitations on making any material change in any of our business objectives that could reasonably be expected to have a material adverse effect on the repayment of our credit facilities.

Such indebtedness could have significant consequences, including:

 

 

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of funding growth, working capital, capital expenditures, investments or other cash requirements;

 

 

reducing our flexibility to adjust to changing business conditions or obtain additional financing;

 

 

exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our term loan facilities, are at variable rates, making it more difficult for us to make payments on our indebtedness;

 

 

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

 

subjecting us to restrictive covenants that may limit our flexibility in operating our business; and

 

 

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements and general corporate or other purposes.

In addition, we may not be able to comply with the financial covenants in the future. In the absence of a waiver from our lenders, any failure by us to comply with these covenants in the future may result in the declaration of an event of default under our secured credit facilities, which could adversely affect our financial position. See “Description of indebtedness.”

Risks related to government regulation

The risk factors listed below describe the risks we face related to government regulation. The companies who manufacture or produce certain of the products we distribute face similar risks with respect to government regulation relating to such products. If such suppliers are unable to comply with government regulations, they may not be able to continue to supply us with products, which could have a material adverse effect on our business, results of operations and financial condition.

 

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Our products and operations are subject to extensive governmental regulation, and our failure to comply with applicable requirements could cause our business to suffer.

The healthcare industry, and in particular the medical device industry, are regulated extensively by governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies and authorities. The FDA and other U.S. and foreign governmental agencies and authorities regulate and oversee, among other things:

 

 

design, development and manufacturing;

 

testing, labeling, content and language of instructions for use and storage;

 

clinical trials;

 

product safety;

 

marketing, sales and distribution;

 

premarket clearance and approval;

 

conformity assessment procedures;

 

record-keeping procedures;

 

advertising and promotion;

 

recalls and other field safety corrective actions;

 

 

postmarket surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;

 

postmarket studies; and

 

product import and export.

The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.

The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as:

 

 

administrative or judicially imposed sanctions;

 

unanticipated expenditures to address or defend such actions;

 

injunctions, consent decrees or the imposition of civil penalties or fines;

 

recall or seizure of our products;

 

total or partial suspension of production or distribution;

 

refusal to grant pending or future clearances or approvals for our products;

 

withdrawal or suspension of regulatory clearances or approvals;

 

clinical holds;

 

untitled letters or warning letters;

 

refusal to permit the import or export of our products; and

 

criminal prosecution of us or our employees.

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and harm our reputation, business, financial condition and results of operations.

The FDA regulatory process is expensive, time-consuming and uncertain, and the failure to obtain and maintain required regulatory clearances and approvals could prevent us from commercializing our products.

Before we can market or sell a new medical device or a new use of or a claim for or significant modification to an existing medical device in the United States, we must obtain either clearance from the FDA under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA, or approval of a PMA, unless an exemption

 

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applies. In the United States, we have obtained 510(k) premarket clearance from the FDA to market products such as Signafuse Bioactive Bone Graft Putty, Interface Bioactive Bone Graft and Signafuse Mineralized Collagen Scaffold. Our Active Healing Therapies, including our Exogen system, Supartz FX and GelSyn-3, have obtained PMA approval. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (preamendments device), a device that was originally on the U.S. market pursuant to an approved PMA application and later downclassified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.

Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to twelve months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, we cannot assure you that any particular device will be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory approvals could harm our business.

Any modification to one of our 510(k) cleared products that would constitute a major change in its intended use, or any change that could significantly affect the safety or effectiveness of the device would require us to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a PMA application, if the change raises complex or novel scientific issues or the product has a new intended use. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer’s decision. We may make changes to our 510(k)-cleared products in the future that we may determine do not require a new 510(k) clearance or PMA approval. If the FDA disagrees with our decision not to seek a new 510(k) or PMA approval for changes or modifications to existing devices and requires new clearances or approvals, we may be required to recall and stop marketing our products as modified, which could require us to redesign our products, conduct clinical trials to support any modifications, and pay significant regulatory fines or penalties. If there is any delay or failure in obtaining required clearances or approvals or if the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our ability to introduce new or enhanced products in a timely manner would be adversely affected, which in turn would result in delayed or no realization of revenue from such product enhancements or new products and could also result in substantial additional costs which could decrease our profitability.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

 

we may not be able to demonstrate to the FDA’s satisfaction that the product or modification is substantially equivalent to the proposed predicate device or safe and effective for its intended use;

 

 

the data from our preclinical studies and clinical trials may be insufficient to support clearance or approval, where required; and

 

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the manufacturing process or facilities we use may not meet applicable requirements.

In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared product on a timely basis. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) clearance process, the FDA initiated an evaluation, and in January 2011, announced several proposed actions intended to reform the 510(k) clearance process. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act enacted in 2012, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval. Some of these proposals and reforms could impose additional regulatory requirements upon us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our current clearances.

Even after clearance or approval for our products is obtained, we are subject to extensive postmarket regulation by the FDA. For example, the FDA has the power to require us to conduct postmarket studies. These studies can be very expensive and time-consuming to conduct. Failure to complete such studies in a timely manner could result in the revocation of clearance or approval and the recall or withdrawal of the product, which could prevent us from generating sales from that product in the United States. Our failure to meet strict regulatory requirements could require us to pay fines, incur other costs or even close our facilities. We cannot assure you that we will successfully maintain the clearances or approvals we have received or may receive in the future.

Our HCT/P products are subject to extensive government regulation and our failure to comply with these requirements could cause our business to suffer.

In the United States, we sell human tissue-derived bone graft substitutes, such as PureBone and OsteoAMP, which are referred to by the FDA as HCT/Ps. Certain HCT/Ps are regulated by the FDA solely under Section 361 of the Public Health Service Act and are referred to as “Section 361 HCT/Ps,” while other HCT/Ps are subject to FDA’s regulatory requirements applicable to medical devices or biologics. Section 361 HCT/Ps do not require 510(k) clearance, PMA approval, biologics license application, or BLA, or other premarket authorization from FDA before marketing. We believe our HCT/Ps are regulated solely under Section 361 of the PHSA, and therefore, we have not sought or obtained 510(k) clearance, PMA approval, or licensure through a BLA. The FDA could disagree with our determination that our human tissue products are Section 361 HCT/Ps and could determine that these products are biologics requiring a BLA or medical devices requiring 510(k) clearance or PMA approval, and could require that we cease marketing such products and/or recall them pending appropriate clearance, approval or license from the FDA. For example, the FDA’s Center for Devices and Radiological Health, or CDRH, issued us a letter in March 2016 in which it asserted that OsteoAMP meets the definition of a medical device, and requested that we provide CDRH with information in support of our position that OsteoAMP does not require 510(k) clearance or PMA approval. We provided CDRH with the requested information in support of this position in May 2016 and we have received no further inquiries to date. We believe that CDRH’s assertion is unfounded and inconsistent with a 2011 letter from the FDA concluding that OsteoAMP meets the criteria for regulation solely as a Section 361 HCT/P. However, if the FDA were to disagree, and if we are otherwise unsuccessful in asserting our position, the FDA may then require that we obtain 510(k) clearance or PMA approval and that we cease marketing OsteoAMP and/or recall OsteoAMP unless and until we receive clearance or approval. We estimate that if we were to cease marketing OsteoAmp and/or recall OsteoAmp that our net sales would decrease, which would adversely affect our results of operations.

 

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Even though we believe that our HCT/Ps are not subject to premarket approval or review, HCT/Ps are subject to donor eligibility and screening, current Good Tissue Practices, or cGTPs, product labeling, and postmarket reporting requirements. If we or our suppliers fail to comply with these requirements, we could be subject to FDA enforcement action, including, for example, warning letters, fines, injunctions, product recalls or seizures, and, in the most serious cases, criminal penalties.

We may be subject to enforcement action if we engage in improper marketing or promotion of our products, and the misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.

The medical devices that we currently market have been cleared or approved by the FDA and other foreign regulatory bodies for specific treatments. However, we cannot prevent a physician from using our products outside of such cleared or approved indications for use, known as “off-label uses”, when in the physician’s independent professional medical judgment, he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those cleared or approved by the FDA or any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

In addition, physicians may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.

Further, our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of off-label use. If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and the curtailment of our operations.

Our products may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could materially harm our business.

Some of our marketed products are subject to Medical Device Reporting, or MDR, obligations, which require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction were to recur, it could likely cause or contribute to a death or serious injury. The timing of our obligation to report under the MDR regulations is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA could take action including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearances, seizure of our products, or delay in clearance of future products.

 

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We and our third-party manufacturers and suppliers are subject to various governmental regulations related to the manufacturing of our products.

Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspection by the FDA and other domestic and foreign regulatory bodies. In particular, the methods used in, and the facilities used for, the manufacture of the medical device products that we own and distribute must comply with the FDA’s QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of medical devices. The FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities, and both we and our third-party manufacturers and suppliers are subject to such inspections.

Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or the manufacturing processes of our third-party manufacturers and suppliers, including any failure to take satisfactory corrective action in response to an adverse QSR inspection, can result in, among other things:

 

 

administrative or judicially imposed sanctions;

 

injunctions or the imposition of civil penalties or fines;

 

recall or seizure of our products;

 

total or partial suspension of production or distribution;

 

refusal to grant pending or future clearances or approvals for our products;

 

withdrawal or suspension of regulatory clearances or approvals;

 

clinical holds;

 

untitled letters or warning letters;

 

refusal to permit the import or export of our products; and

 

criminal prosecution of us or our employees.

Any of these actions could prevent or delay us from marketing, distributing or selling our products and would likely harm our business. Furthermore, our suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.

Our products may be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in their design or manufacture. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device would cause serious injury or death. We have in the past instituted a voluntary recall for certain of our products and we may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and could adversely affect our reputation and business, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to generate profits.

 

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Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary recalls or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls and we may be subject to enforcement action.

As we conduct clinical studies designed to generate long-term data on some of our existing products, the data we generate may not be consistent with our existing data and may demonstrate less favorable safety or efficacy.

We are currently collecting and plan to continue collecting long-term clinical data regarding the quality, safety and effectiveness of some of our existing products. The clinical data collected and generated as part of these studies will further strengthen our clinical evaluation concerning safety and performance of these products. We believe that this additional data will help with the marketing of our products by providing surgeons and physicians with additional confidence in their long-term safety and efficacy. If the results of these clinical studies are negative, these results could reduce demand for our products and significantly reduce our ability to achieve expected net sales. We do not expect to undertake such studies for all of our products and will only do so in the future where we anticipate the benefits will outweigh the costs and risks. For these reasons, surgeons and physicians could be less likely to purchase our products than competing products for which longer-term clinical data are available. Also, we may not choose or be able to generate the comparative data that some of our competitors have or are generating and we may be subject to greater regulatory and product liability risks. If we are unable to or unwilling to collect sufficient long-term clinical data supporting the quality, safety and effectiveness of our existing products, our business, results of operations and financial condition could be adversely affected.

We may rely on third parties to conduct our clinical studies and to assist us with preclinical development and if they fail to perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval for or commercialize our products.

We may rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to assist in conducting our clinical studies. If these third parties fail to successfully carry out their contractual duties, comply with applicable regulatory obligations, meet expected deadlines, or if these third parties must be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to clinical protocols or applicable regulatory requirements or for other reasons, our pre-clinical development activities or clinical studies may be extended, delayed, suspended or terminated. Under these circumstances we may not be able to obtain regulatory clearance or approval for, or successfully commercialize, our products on a timely basis, if at all, and our business may be adversely affected.

If clinical studies of our future products do not produce results necessary to support regulatory clearance or approval in the United States or elsewhere, we will be unable to expand the indications for or commercialize these products.

We will likely need to conduct additional clinical studies in the future to support new indications for our products or for clearances or approvals of new product lines, or for the approval of the use of our products in some foreign countries. Clinical testing can take many years, can be expensive and carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons. Conducting successful clinical studies requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators and support staff, proximity of patients to clinical sites, patient ability to meet the eligibility and exclusion criteria for

 

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participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.

Clinical failure can occur at any stage of testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical studies in addition to those we have planned. Our failure to adequately demonstrate the safety and efficacy of any of our devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use. Even if our future products are cleared in the United States, commercialization of our products in foreign countries would require approval by regulatory authorities in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. Any of these occurrences could have an adverse impact on our business.

Healthcare regulatory reform may affect our ability to sell our products profitably and could have a material adverse effect on our business.

In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the regulatory and healthcare systems in ways that could prevent or delay marketing approval of our products in development, restrict or regulate post-approval activities of our products and impact our ability to sell our products profitably. In the United States in recent years, new legislation has been proposed and adopted at the federal and state level that is effecting major changes in the healthcare system. In addition, new regulations and interpretations of existing healthcare statutes and regulations are frequently adopted.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, were signed into law. While the goal of healthcare reform is to expand coverage to more individuals, it also involves increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. The Affordable Care Act substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services and significantly impacts the medical technology industry. Among other things, the Affordable Care Act:

 

 

imposed an annual excise tax of 2.3% on any entity that manufactures or imports prescription drugs, biologic agents and medical devices offered for sale in the United States, which was suspended from January 1, 2016, to December 31, 2017, by the Consolidated Appropriations Act of 2016, but will be reinstated starting January 1, 2018, absent further action;

 

 

increased the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

 

 

created a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;

 

 

extended manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;

 

 

expanded eligibility criteria for Medicaid programs;

 

 

established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research;

 

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implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and

 

 

created an independent payment advisory board that will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

In addition, third-party payors regularly update payments to physicians and hospitals where our products are used. For example, on April 16, 2015, President Obama signed into law the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA. Among other things, MACRA extended existing payment rates through June 30, 2015, with a 0.5% update for July 1, 2015 through December 31, 2015, and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. In addition, the Budget Control Act of 2011 and the Bipartisan Budget Act of 2015 imposed reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013, and, due to subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These payment updates could directly impact the demand for our products or any products we may develop in the future, if cleared or approved.

We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any cleared or approved products. Furthermore, we believe that many individuals who have obtained insurance coverage through the health insurance exchanges which arose as a result of the Affordable Care Act have done so with policies that have significantly higher deductibles than policies they may have obtained prior to its enactment. Because the out-of-pocket costs of undergoing a treatment for patients who have not met their deductible for a given year would be significantly higher than they historically would have been, these patients may be discouraged from undergoing such a treatment due to the cost. Any reluctance on the part of patients to undergo treatment due to cost could impact our ability to expand sales of our products and could adversely impact our business.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for cleared or approved products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our products, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and postmarketing testing and other requirements.

We may be subject to federal, state and foreign laws and regulations relating to our healthcare business, and could face substantial penalties if we are determined not to have fully complied with such laws, which would have an adverse impact on our business.

We may be subject to healthcare fraud and abuse regulation and enforcement by federal, state and foreign governments, which could adversely impact our business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include:

 

 

the federal Anti-Kickback Statute, which applies to our marketing practices, educational programs, pricing and discounting policies and relationships with healthcare providers, by prohibiting, among other things,

 

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persons and entities from knowingly and willfully soliciting, receiving, offering or providing remuneration intended to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare or Medicaid programs. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it to have committed a violation;

 

 

the federal civil and criminal false claims laws and civil monetary penalties laws, including the False Claims Act, which impose civil and criminal penalties through governmental, civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to pay or transmit money or property to the federal government or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property to the federal government. The government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes;

 

 

HIPAA and its implementing regulations, which created federal criminal laws that prohibit, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

 

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, which also imposes certain regulatory and contractual requirements regarding the privacy, security and transmission of personal health information;

 

 

the federal Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to certain payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members and payments or other “transfers of value” to such physician owners;

 

 

federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;

 

 

federal government price reporting laws, which require us to calculate and report complex pricing metrics in an accurate and timely manner to government programs, and where the failure to report such prices may expose us to potential liability; and

 

 

state and foreign law equivalents of each of the above federal laws and regulations, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical and device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state laws that require drug and device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of certain health information, many of which differ from each other in significant ways and some of which may be more stringent than HIPAA or HITECH.

 

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The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. We are unable to predict what additional federal, state or foreign legislation or regulatory initiatives may be enacted in the future regarding our business or the healthcare industry in general, or what effect such legislation or regulations may have on us. Federal, state or foreign governments may impose additional restrictions or adopt interpretations of existing laws that could have a material adverse effect on us.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including certain sales and marketing practices and financial arrangements with physicians and other healthcare providers, some of whom recommend, use, prescribe or purchase our products, and other customers, could be subject to challenge under one or more of such laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental healthcare programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely impact our business.

If we fail to meet Medicare accreditation and surety bond requirements or DMEPOS supplier standards, it could negatively affect our business operations.

Our Exogen system is classified by CMS and third-party payors as durable medical equipment. Suppliers of Medicare durable medical equipment, prosthetics, orthotics and supplies, or DMEPOS, must be accredited by an approved accreditation organization as meeting DMEPOS quality standards adopted by CMS and are required to meet surety bond requirements. In addition, Medicare DMEPOS suppliers must comply with Medicare supplier standards in order to obtain and retain billing privileges, including meeting all applicable federal and state licensure and regulatory requirements. CMS periodically expands or otherwise clarifies the Medicare DMEPOS supplier standards, and states periodically change licensure requirements, including licensure rules imposing more stringent requirements on out-of-state DMEPOS suppliers. We believe we currently are in compliance with these requirements. If we fail to maintain our Medicare accreditation status and/or do not comply with Medicare surety bond or supplier standard requirements or state licensure requirements in the future, or if these requirements are changed or expanded, it could adversely affect our profits and results of operations.

Audits or denials of our claims by government agencies could reduce our net sales or profits.

In connection with our Exogen system, we submit claims on behalf of patients directly to, and receive payments directly from, the Medicare and Medicaid programs and private payors. Therefore, we are subject to extensive government regulation, including detailed requirements for submitting reimbursement claims under appropriate codes and maintaining certain documentation to support our claims. Medicare contractors and Medicaid agencies periodically conduct pre- and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize healthcare claims and supporting documentation. We may be subject to pre-payment and post-payment reviews, as well as audits of claims in the future. Private payors may from time to time conduct similar reviews and audits. Such reviews and similar audits of our claims could result in material delays in payment, material recoupments, overpayments, or claim denials, or exclusion from participation in the Medicare or Medicaid programs, all of which could reduce our net sales and profitability.

 

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Our operations involve the use of hazardous and toxic materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive, and could have an adverse affect on our business.

We are subject to a variety of federal, state, local and foreign laws and regulations relating to the protection of the environment or of human health and safety, including laws pertaining to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. Liability under environmental laws can be imposed on a joint and several basis (which could result in an entity paying more than its fair share) and without regard to comparative fault, and environmental laws are likely to become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could have an adverse affect on our business.

Our employees, independent distributors, independent contractors, suppliers and other third parties may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could expose us to liability and hurt our reputation.

We are exposed to the risk that our employees, independent distributors, independent contractors, suppliers and others may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (1) FDA laws and regulations, including those laws that require the reporting of true, complete and accurate information to the FDA, (2) manufacturing standards, (3) healthcare fraud and abuse laws, or (4) laws that require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in our preclinical studies or clinical trials or illegal misappropriation of product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred.

If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Risks related to intellectual property matters

The risk factors listed below describe the risks we face related to intellectual property matters. The companies who own certain of the products we distribute face similar risks with respect to intellectual property relating to such products. If such suppliers are unable to protect their intellectual property rights, they may not be able to continue to supply us with products, which could have a material adverse effect on our business, results of operations and financial condition.

Protection of our intellectual property rights may be difficult and costly, and our inability to protect our intellectual property could adversely affect our competitive position.

Our success depends significantly on our ability to protect our proprietary rights to the technologies and inventions used in, or embodied by, our products. To protect our proprietary technology, we rely on patent

 

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protection, as well as a combination of copyright, trade secret and trademark laws, as well as nondisclosure, confidentiality and other contractual restrictions in our consulting and employment agreements. These legal means afford only limited protection, however, and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our existing confidentiality and/or invention assignment agreements with employees, contractors, and others who participate in IP development activities could be breached, or we may not enter into sufficient and adequate agreements with those individuals in the first instance, and we may not have adequate remedies for such breaches. Furthermore, we may be subject to, and forced to defend against, third-party claims of ownership to our intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or rights to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Patents

The process of applying for patent protection itself is time-consuming and expensive and we cannot assure you that all of our patent applications will issue as patents or that, if issued, they will issue in a form that will be advantageous to us. The rights granted to us under our patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage, and they could be opposed, contested, narrowed, or circumvented by our competitors or declared invalid or unenforceable in judicial or administrative proceedings. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our R&D output before it is too late to obtain patent protection. We may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents licensed to us by third-parties. Therefore, these patents and applications may not be prosecuted or enforced in a manner consistent with the best interests of our business. If such licensors fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated, which could also have a material adverse effect on our business.

We own numerous issued patents and pending patent applications relating to our technology and products. The rights granted to us under these patents, including prospective rights sought in our pending patent applications, could be opposed, contested or circumvented by our competitors or declared invalid or unenforceable in judicial or administrative proceedings. If any of our patents are challenged, invalidated or legally circumvented by third-parties, and if we do not own other enforceable patents protecting our products, competitors could market products and use processes that are substantially similar to, or superior to, ours, and our business will suffer. In addition, the patents we own may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage, and competitors may be able to design around our patents or develop products that provide outcomes comparable to ours without infringing on our intellectual property rights.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switch the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The U.S. Patent and Trademark Office, or USPTO, recently developed new regulations and procedures to govern administration of

 

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the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition. In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement, and defense of our patents and applications. We may be subject to a third-party preissuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or other patent office proceedings or litigation, in the United States or elsewhere, challenging our patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third-parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

Moreover, the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effect on our business.

Furthermore, we do not have patent rights in certain foreign countries in which a market may exist in the future, and the laws of many foreign countries may not protect our intellectual property rights or provide mechanisms for the enforcement of same to the same extent as the laws of the United States. We may need to expend additional resources to defend our intellectual property rights in these countries, and the inability to defend the same could impair our brand or adversely affect the growth of our business internationally. For example, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products.

Trademarks

We rely on our trademarks as one means to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. However, we may not be able to successfully secure trademark registrations for all such applications. Third-parties may oppose our trademark applications, or otherwise challenge our use of both registered and unregistered trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate resources to enforce our trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks, then we may not be able to compete effectively and our business may be adversely affected.

 

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Trade secrets and know-how

We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective.

Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Our competitors could use any of the information we may be required to disclose by the FDA to develop independently technology similar to ours. Competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

If we were to enforce a claim that a third-party had illegally obtained, misappropriated or was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. If any of the technology or information that we protect as trade secrets were to be independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret.

We depend on certain technologies that are licensed to us. We do not control the intellectual property rights covering these technologies and any loss of our rights to these technologies or the rights licensed to us could prevent us from selling our products, which could adversely impact our business.

We are a party to license agreements under which we are granted rights to intellectual property that is important to our business, and we may need to enter into additional license agreements in the future. For example, we expect that we will be dependent on our licensing arrangements with Pfizer relating to our next-generation BMP product candidates. We rely on these licenses in order to be able to use and sell various proprietary technologies that are material to our business, as well as technologies which we intend to use in our future commercial activities. Our rights to use these technologies and the inventions claimed in the licensed patents are subject to the continuation of and our compliance with the terms of those licenses. Our existing license agreements impose, and we expect that future license agreements will impose on us, various diligence obligations, payment of milestones or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which case we would not be able to market products covered by the license, which would adversely affect our financial condition.

As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of our products and technologies. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In the event that we are not able

 

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to acquire a license, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products and technologies, which could materially harm our business. In addition, the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties or other forms of compensation and damages.

In some cases, we may not have the right to control the prosecution, maintenance, or filing of the patents that are licensed to us, or the enforcement of these patents against infringement by third parties. Some of our patents and patent applications were not filed by us, but were either acquired by us or are licensed from third parties. Thus, these patents and patent applications were not drafted by us or our attorneys, and we did not control or have any input into the prosecution of these patents and patent applications prior to our acquisition of, or our entry into a license with respect to, such patents and patent applications. We cannot be certain that the drafting or prosecution of the patents and patent applications licensed to us will result or has resulted in valid and enforceable patents. Further, we do not always retain complete control over our ability to enforce our licensed patent rights against third-party infringement. In those cases, we cannot be certain that our licensor will elect to enforce these patents to the extent that we would choose to do so, or in a way that will ensure that we retain the rights we currently have under our license. If our licensor fails to properly enforce the patents subject to our license in the event of third-party infringement, our ability to retain our competitive advantage with respect to our products may be materially and adversely affected.

Licensing of intellectual property is an important part of our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property that is subject to a license agreement, including:

 

 

the scope of rights granted under the license agreement and other interpretation-related issues;

 

 

whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the license agreement;

 

 

our right to sublicense patent and other rights to third parties under collaborative development relationships;

 

 

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our products and technologies, and what activities satisfy those diligence obligations; and

 

 

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

In addition, we may become the owner of intellectual property that was obtained through assignments which may be subject to re-assignment back to the original assignor upon our failure to prosecute or maintain such intellectual property, upon our breach of the agreement pursuant to which such intellectual property was assigned, or upon our bankruptcy.

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, or if intellectual property is re-assigned back to the original assignor, we may be unable to successfully develop and commercialize the affected products and technologies.

We may in the future be a party to patent and other intellectual property litigation and administrative proceedings that could be costly and could interfere with our ability to successfully market our products.

The medical technology industry has been characterized by frequent and extensive intellectual property litigation and is highly competitive. Our competitors or other patent holders may assert that our products and/

 

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or the methods employed in our products are covered by their patents or that we are infringing, misappropriating, or misusing their trademark, copyright, trade secret, and/or other proprietary rights.

If our products or methods are found to infringe, we could be prevented from manufacturing or marketing our products. In the event that we become involved in such a dispute, we may incur significant costs and expenses and may need to devote resources to resolving any claims, which would reduce the cash we have available for operations and may be distracting to management and other employees, including those involved in the development of intellectual property. We do not know whether our competitors or potential competitors have applied for, will apply for, or will obtain patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our products. Because patent applications can take many years to issue, third parties may have currently pending patent applications which may later result in issued patents that our products and technologies may infringe, or which such third parties claim are infringed by the use of our products or technologies. There is no guarantee that patents will not issue in the future from currently pending applications that may be infringed by our technology or products. In addition, identification of third-party patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases, and difficulty in assessing the meaning of patent claims. Moreover, as the medical technology industry expands and more patents are issued in this area, the risk increases that we may be subject to claims of infringement of the patent rights of third parties. We cannot assure you that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets or infringement by us of third-party patents, copyrights, trademarks or other rights or challenging the validity of our patents, copyrights, trademarks or other rights will not be asserted against us. Competing products may also be sold in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit alleging our infringement of a competitor’s patents, we could be prevented from marketing our products in one or more foreign countries.

We may also initiate litigation against third-parties to enforce our patent and proprietary rights or to determine the scope, enforceability or validity of the proprietary rights of others. Our intellectual property has not been tested in litigation. If we initiate litigation to protect our rights, we run the risk of having our patents and other proprietary rights invalidated, canceled or narrowed, which could undermine our competitive position. Further, if the scope of protection provided by our patents or patent applications or other proprietary rights is threatened or reduced as a result of litigation, it could discourage third parties from entering into collaborations with us that are important to the commercialization of our products.

Litigation related to infringement and other intellectual property claims, with or without merit, is unpredictable, can be expensive and time-consuming and can divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, treble damages and attorneys’ fees and could prohibit us from using technologies essential to our products, any of which would have a material adverse effect on our business. If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our products unless we can obtain licenses to use technology or ideas covered by such patents. We do not know whether any necessary licenses would be available to us on satisfactory terms, if at all. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon the product altogether. As a result, our ability to grow our business and compete in the market may be harmed.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If these results are perceived to be negative, the price of our Class A common stock could be adversely affected.

 

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In addition, certain of our agreements with suppliers, distributors, customers and other entities with whom we do business may require us to defend or indemnify these parties to the extent they become involved in infringement claims relating to our technologies or products, or rights licensed to them by us. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify any of these third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results, or financial condition.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or former employers or are in breach of non-competition or non-solicitation agreements with our competitors or former employers.

We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers or competitors. In addition, we may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the competitors or former employers. An inability to incorporate technologies or features that are important or essential to our products could have an adverse impact on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could have an adverse impact on our business.

Risks related to our company and our organizational structure

Our principal asset after the completion of this offering will be our interest in Bioventus LLC, and, accordingly, we will depend on distributions from Bioventus LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Bioventus LLC’s ability to make such distributions may be subject to various limitations and restrictions.

Upon the consummation of this offering, we will be a holding company and will have no material assets other than our ownership of LLC Interests of Bioventus LLC. As such, we will have no independent means of generating net sales or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of Bioventus LLC and its subsidiaries and distributions we receive from Bioventus LLC. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.

Bioventus LLC will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of LLC Interests, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of Bioventus LLC. Under the terms of the Bioventus LLC Agreement, Bioventus LLC will be obligated to make tax distributions to holders of LLC Interests, including us, subject to any limitations or restrictions in our debt arrangements. In addition to tax expenses, we will also incur expenses related to our operations, including payments under the Tax Receivable Agreement, which we expect could be significant. See “Certain relationships and related party transactions—Tax Receivable Agreement.” We intend, as its managing

 

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member, to cause Bioventus LLC to make cash distributions to the owners of LLC Interests in an amount sufficient to (i) fund their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses, including payments under the Tax Receivable Agreement. However, Bioventus LLC’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which Bioventus LLC is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering Bioventus LLC insolvent. If we do not have sufficient funds to pay taxes or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. See “Certain relationships and related party transactions—Tax Receivable Agreement.” In addition, if Bioventus LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See “—Risks related to this offering and ownership of our Class A common stock” and “Dividend policy.”

The Tax Receivable Agreement with the Continuing LLC Owners requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make could be significant.

Upon the closing of this offering, we will be a party to the Tax Receivable Agreement with the Continuing LLC Owners. Under the Tax Receivable Agreement, we will be required to make cash payments to the Continuing LLC Owners equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (1) the increases in the tax basis of assets of Bioventus LLC resulting from any future redemptions or exchanges of LLC Interests described under “Certain relationships and related party transactions—Bioventus LLC Agreement—LLC Interest Redemption Right,” and (2) certain other tax benefits related to our making payments under the Tax Receivable Agreement. We expect the amount of the cash payments that we will be required to make under the Tax Receivable Agreement will be significant. The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of LLC Interests, the amount of gain recognized by such holders of LLC Interests, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable. Any payments made by us to the Continuing LLC Owners under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make timely payments under the Tax Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned on any Continuing LLC Owner’s continued ownership of LLC Interests or our Class A common stock after this offering. For more information, see “Certain relationships and related party transactions—Tax Receivable Agreement.”

Our organizational structure, including the Tax Receivable Agreement, confers certain tax benefits upon the Continuing LLC Owners that may not benefit Class A common stockholders to the same extent as they will benefit the Continuing LLC Owners.

Our organizational structure, including the Tax Receivable Agreement, confers certain tax benefits upon the Continuing LLC Owners that may not benefit the holders of our Class A common stock to the same extent as they will benefit the Continuing LLC Owners. We will enter into the Tax Receivable Agreement with Bioventus

 

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LLC and the Continuing LLC Owners that will provide for our payment to the Continuing LLC Owners of 85% of the amount of tax benefits, if any, that we actually realize (or in some circumstances are deemed to realize) as a result of (i) increases in the tax basis of assets of Bioventus LLC resulting from any future redemptions or exchanges of LLC Interests described under “Certain relationships and related party transactions—Bioventus LLC Agreement—LLC Interest Redemption Right,” and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement. Although Bioventus will retain 15% of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.

In certain cases, payments under the Tax Receivable Agreement to the Continuing LLC Owners may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement provides that if (i) we materially breach any of our material obligations under the Tax Receivable Agreement, (ii) certain mergers, asset sales, other forms of business combinations or other changes of control were to occur on or before December 31, 2017 or (iii) we elect an early termination of the Tax Receivable Agreement, then our obligations or our successor’s obligations under the Tax Receivable Agreement to make payments thereunder would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.

As a result of the foregoing, (i) we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and (ii) if we materially breach any of our material obligations under the Tax Receivable Agreement or if we elect to terminate the Tax Receivable Agreement early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement. See “Certain relationships and related party transactions—Tax Receivables Agreement.”

We may make payments to the Continuing LLC Owners under the Tax Receivable Agreement that exceed the tax benefits initially claimed by us in the event that any tax benefits are disallowed by a taxing authority.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the Internal Revenue Service, or the IRS, or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take, and a court could sustain such challenge. Pursuant to the Tax Receivable Agreement, the Continuing LLC Owners are required to reimburse us for any cash payments previously made to the Continuing LLC Owners under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to a Continuing LLC Owner are subsequently challenged by a taxing authority and are ultimately disallowed. In addition, but without duplication of any amounts previously reimbursed by any Continuing LLC Owner, any excess cash payments made by us to a Continuing LLC Owner will be netted against any future cash payments that we might otherwise be required to make to such Continuing LLC Owner under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to a Continuing LLC Owner for a number of years following the initial time of such payment. Moreover, there can be no assurance that any excess cash payments for which the Continuing LLC Owners have a reimbursement obligation under the Tax

 

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Receivable Agreement will be repaid to us. As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the tax attributes with respect to a Continuing LLC Owner that are the subject of the Tax Receivable Agreement. See “Certain relationships and related party transactions—Tax Receivable Agreement.”

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.

We are subject to taxes by the U.S. federal, state, local and foreign tax authorities, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

 

changes in the valuation of our deferred tax assets and liabilities;

 

 

expected timing and amount of the release of any tax valuation allowances;

 

 

tax effects of stock-based compensation;

 

 

changes in tax laws, regulations or interpretations thereof; or

 

 

future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state, local and foreign taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act, as a result of our ownership of Bioventus LLC, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

As the sole managing member of Bioventus LLC, we will control and operate Bioventus LLC. On that basis, we believe that our interest in Bioventus LLC is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of Bioventus LLC, our interest in Bioventus LLC could be deemed an “investment security” for purposes of the 1940 Act.

We and Bioventus LLC intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Bioventus is controlled by the Original LLC Owners, whose interests may differ from those of our public stockholders.

Immediately following this offering and the application of net proceeds from this offering, the Original LLC Owners will control approximately 73.5% of the combined voting power of our common stock through their

 

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ownership of both Class A common stock and Class B common stock. The Original LLC Owners will, for the foreseeable future, have significant influence over corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval. The Original LLC Owners are able to, subject to applicable law, and the voting arrangements described in “Certain relationships and related party transactions,” elect a majority of the members of our board of directors and control actions to be taken by us and our board of directors, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors so elected will have the authority, subject to the terms of our indebtedness and applicable rules and regulations, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. It is possible that the interests of the Original LLC Owners may in some circumstances conflict with our interests and the interests of our other stockholders, including you. For example, the Continuing LLC Owners may have different tax positions from us, especially in light of the Tax Receivable Agreement that could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when Bioventus should terminate the Tax Receivable Agreement and accelerate its obligations thereunder. In addition, the determination of future tax reporting positions and the structuring of future transactions may take into consideration these Continuing LLC Owners’ tax or other considerations, which may differ from the considerations of us or our other stockholders. See “Certain relationships and related party transactions—Tax Receivable Agreement.”

Our amended and restated certificate of incorporation will, to the extent permitted by applicable law, contain provisions renouncing our interest and expectation to participate in certain corporate opportunities identified or presented to certain of our Original LLC Owners.

Certain of the Original LLC Owners are in the business of making or advising on investments in companies and these Original LLC owners may hold, and may, from time to time in the future, acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or the business of our suppliers. Our amended and restated certificate of incorporation will provide that, to the fullest extent permitted by law, none of the Original LLC Owners or any director who is not employed by us or his or her affiliates will have any duty to refrain from engaging in a corporate opportunity in the same or similar lines of business as us. The Original LLC Owners may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. As a result, these arrangements could adversely affect our business, financial condition, results of operations or prospects if attractive business opportunities are allocated to any of the Original LLC Owners instead of to us. See “Description of capital stock—Corporate opportunities.”

We are a “controlled company” within the meaning of The NASDAQ Global Market listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Substantially concurrent with the closing of this offering, the Voting Group, which will hold Class A common stock and Class B common stock representing approximately 72.9% of the combined voting power of our common stock, intends to enter into the Stockholders Agreement. Pursuant to the terms of the Stockholders Agreement, until such time as Essex Woodlands Health Ventures and certain other members of the Voting Group own less than 10% of the total shares of our Class A common stock owned by them as of the date this offering is consummated, and Smith & Nephew collectively owns less than 10% of the total shares of our Class B common stock owned by them as of the date this offering is consummated, or the Stockholders Agreement is otherwise terminated in accordance with its terms, the parties to the Stockholders Agreement will agree to vote their shares of Class A common stock and Class B common stock in favor of the election of the nominees of certain members of the Voting Group to our board of directors upon their nomination by the nominating and corporate governance committee of our board of directors. See “Description of capital stock—Stockholders Agreement.”

 

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Because of the Stockholders Agreement and the aggregate voting power over our Class A common stock and Class B common stock held by the parties to the Stockholders Agreement, we are considered a “controlled company” for the purposes of The NASDAQ Global Market. As such, we are exempt from certain corporate governance requirements of The NASDAQ Global Market, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors and (3) the requirement that we have a compensation committee that is composed entirely of independent directors. Following this offering, we intend to rely on some or all of these exemptions. As a result, we will not have a majority of independent directors and our compensation and nominating and corporate governance committees will not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of The NASDAQ Global Market.

Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change in control would be beneficial to our stockholders.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in control would be beneficial to our stockholders. These provisions include:

 

 

authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

 

 

establishing a classified board of directors so that not all members of our board of directors are elected at one time;

 

 

the removal of directors only for cause;

 

 

prohibiting the use of cumulative voting for the election of directors;

 

 

limiting the ability of stockholders to call special meetings or amend our bylaws;

 

 

requiring all stockholder actions to be taken at a meeting of our stockholders; and

 

 

establishing advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

In addition, the Delaware General Corporation Law, or DGCL, to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.

Our amended and restated certificate of incorporation will authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine the preferences, limitations and relative

 

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rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Class A common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.

The provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.

Our amended and restated certificate of incorporation will require, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or the bylaws or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

Risks related to this offering and ownership of our Class A common stock

We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, or comply with the accounting and reporting requirements applicable to public companies, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2015, 2014 and 2013, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

Our material weaknesses include the following:

We did not design and maintain an effective control environment with the sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to properly analyze, record and disclose accounting matters commensurate with our accounting and financial reporting requirements. This material weakness contributed to additional material weaknesses in which, specifically, we did not design and maintain effective internal control over:

 

 

Accuracy and presentation and disclosure of sales allowances, distributor fees and bad debt expenses;

 

 

Cutoff and presentation and disclosures of revenue recognition, including the impact on cost of sales and selling, general and administrative expenses (sales commissions) and sales allowances;

 

 

Completeness, accuracy and presentation and disclosure of intangible asset amortization expense, including impact on inventories and cost of sales;

 

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Completeness, accuracy, valuation and presentation and disclosure of the contingent consideration liability related to business combinations;

 

 

Completeness, accuracy, and presentation and disclosure of foreign currency transaction and translation gains and losses;

 

 

Completeness, existence, accuracy and presentation and disclosure of quarterly income tax provisions and deferred tax accounting;

 

 

Completeness, accuracy and presentation and disclosure of the statement of cash flows, specifically as it relates to excess partner distributions, payment of in-kind interest and the impact of foreign currency; and

 

 

Accuracy and presentation and disclosure of the financial statements, commensurate with our financial reporting requirements.

These material weaknesses resulted in adjustments to accounts receivable, inventories, goodwill, accrued sales commissions, contingent consideration liabilities, equity, net sales, cost of sales, selling, general and administrative expenses, restructuring costs, depreciation and amortization, foreign currency transaction gains and losses and income tax expense in our consolidated financial statements for the years ended December 31, 2013, 2014 and 2015.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. However, neither our management nor an independent registered public accounting firm has ever performed an evaluation of our internal control over financial reporting in accordance with the rules of the SEC because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting, additional material weaknesses may have been identified. Further, due to a transition period established by the rules of the SEC for newly public companies, our management will not be required to provide a management report on internal control over financial reporting until our second annual report following this offering, which will be our fiscal year ending December 31, 2017, and our independent registered public accounting firm will not be required to attest to our management report on internal control over financial reporting until we are no longer an EGC.

We have implemented and are still in the process of implementing measures designed to improve our internal control over financial reporting and remediate our material weaknesses, including:

 

 

The augmentation and training of our accounting staff, including the appointment of a U.S. Controller at our headquarters in January 2015;

 

 

The continued centralization of accounting operations, including the transition of the U.S. accounts receivable, inventory and accounts payables functions to our headquarters during the first half of 2015;

 

 

The commissioning of a third-party specialist to provide recommendations for improvement and to assist us in formalizing the documentation of our accounting policies and internal controls; and

 

 

The hiring of a Chief Accounting Officer in April 2016.

In addition, during 2016, we plan to review our finance and accounting function to evaluate whether we have a sufficient number of appropriately trained and experienced personnel and plan to add new personnel as we deem necessary.

Although we plan to complete these remediation activities as quickly as possible, we cannot at this time estimate how long the remediation will take or cost to achieve, and our initiatives may not prove to be

 

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successful in remediating these weaknesses and deficiencies. We cannot assure you that the measures we have taken to date, together with any measures we may take in the future, will be sufficient to remediate our material weaknesses in our internal control over financial reporting or to avoid potential future material weaknesses. If the steps we take do not correct the material weaknesses in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting, and as a public company, we may have difficulties reporting on a quarterly basis with a review from our independent registered auditors in a timely manner. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. As we have not fully completed the updates to our control structure and have not completed our evaluation and testing of these controls, we cannot be certain that these material weaknesses will be fully remediated or that other material weaknesses and any significant deficiencies or internal control deficiencies will not be discovered in the future.

If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional existing material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, our reported financial results may be materially misstated, investors may lose confidence in our financial reporting and our stock price may decline as a result. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, business, financial condition and divert financial and management resources from our core business.

Immediately following the consummation of this offering, the Continuing LLC Owners will have the right to have their LLC Interests redeemed pursuant to the terms of the Bioventus LLC Agreement, which may dilute the owners of the Class A common stock.

After this offering, we will have an aggregate of 126,272,381 shares of Class A common stock authorized but unissued, including approximately 9,571,764 shares of Class A common stock issuable upon redemption of LLC Interests that will be held by the Continuing LLC Owners. Bioventus LLC will enter into the Bioventus LLC Agreement and, subject to certain restrictions set forth therein and as described elsewhere in this prospectus, the Continuing LLC Owners will be entitled to have their LLC Interests redeemed for shares of our Class A common stock. We also intend to enter into a Registration Rights Agreement pursuant to which the shares of Class A common stock issued to the Original LLC Owners upon redemption of LLC Interests and the shares of Class A common stock issued to the Former LLC Owners in connection with the Transactions will be eligible for resale, subject to certain limitations set forth therein. See “Certain relationships and related party transactions—Registration Rights Agreement.”

We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.

If you purchase shares of Class A common stock in this offering, you will incur immediate and substantial dilution.

Dilution is the difference between the offering price per share and the pro forma net tangible book value per share of our Class A common stock immediately after the offering. The price you pay for shares of our Class A common stock sold in this offering is substantially higher than our pro forma net tangible book value per share immediately after this offering. If you purchase shares of Class A common stock in this offering, you will incur

 

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immediate and substantial dilution in the amount of $18.75 per share based upon an assumed initial public offering price of $17.00 per share (the midpoint of the price range listed on the cover page of this prospectus). In addition, you may also experience additional dilution, or potential dilution, upon future equity issuances to investors or to our employees and directors under our stock option plan and any other equity incentive plans we may adopt. As a result of this dilution, investors purchasing shares of Class A common stock in this offering may receive significantly less than the full purchase price that they paid for the stock purchased in this offering in the event of liquidation. See “Dilution.”

We do not know whether a market will develop for our Class A common stock or what the market price of our Class A common stock will be and as a result it may be difficult for you to sell your shares of our Class A common stock.

Before this offering, there was no public trading market for our Class A common stock. If a market for our Class A common stock does not develop or is not sustained, it may be difficult for you to sell your shares of Class A common stock at an attractive price or at all. We cannot predict the prices at which our Class A common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our Class A common stock may fall.

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our Class A common stock, the price of our Class A common stock could decline.

The trading market for our Class A common stock will rely in part on the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or securities analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our Class A common stock could decline. If one or more of these analysts cease to cover our Class A common stock, we could lose visibility in the market for our stock, which in turn could cause our Class A common stock price to decline.

We expect that the price of our Class A common stock will fluctuate substantially and you may not be able to sell the shares you purchase in this offering at or above the offering price.

The initial public offering price for the shares of our Class A common stock sold in this offering is determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our Class A common stock following this offering. In addition, the market price of our Class A common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:

 

 

the volume and timing of sales of our products;

 

 

the introduction of new products or product enhancements by us or our competitors;

 

 

disputes or other developments with respect to our or others’ intellectual property rights;

 

 

our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis;

 

 

product liability claims or other litigation;

 

 

quarterly variations in our results of operations or those of our competitors;

 

 

media exposure of our products or our competitors;

 

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changes in governmental regulations or in reimbursement;

 

 

changes in earnings estimates or recommendations by securities analysts; and

 

 

general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our Class A common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our Class A common stock shortly following this offering. If the market price of shares of our Class A common stock after this offering does not ever exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business.

Substantial future sales of our Class A common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our Class A common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our Class A common stock and could impair our ability to raise capital through the sale of additional shares. Upon the closing of this offering, we will have 23,727,619 shares of Class A common stock outstanding (or 25,051,148 if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and 9,571,764 shares of Class A common stock that would be issuable upon redemption or exchange of LLC Interests authorized but unissued. The shares of Class A common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

The remaining outstanding 14,904,090 shares of Class A common stock held by the Former LLC Owners will be subject to certain restrictions on sale. We and each of our executive officers and directors and the Original LLC Owners, which collectively will hold 73.5% of our outstanding capital stock (including shares of Class A common stock issuable upon redemption or exchange of LLC Interests) upon the closing of this offering, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for (including the LLC Interests), or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC. See “Underwriting.” All of our shares of common stock outstanding as of the date of this prospectus (and shares of Class A common stock issuable upon redemption or exchange of LLC Interests) may be sold in the public market by existing stockholders following the expiration of the applicable lock-up period, subject to applicable limitations imposed under federal securities laws.

We also intend to enter into a Registration Rights Agreement pursuant to which the shares of Class A common stock issued upon redemption or exchange of LLC Interests held by certain of the Continuing LLC Owners and

 

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the shares of Class A common stock issued to the Former LLC Owners in connection with the Transactions will be eligible for resale, subject to certain limitations set forth therein. See “Certain relationships and related party transactions—Registration Rights Agreement.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of Class A common stock subject to outstanding options and Class A common stock (a) issued or issuable under our stock plans and (b) issuable to the Phantom Plan Participants under the Phantom Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market following the expiration of the applicable lock-up period. We expect that the initial registration statement on Form S-8 will cover 3,868,169 shares of our Class A common stock.

See “Shares eligible for future sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In the future, we may also issue additional securities if we need to raise capital, which could constitute a material portion of our then-outstanding shares of common stock.

Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our Class A common stock less attractive to investors.

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

 

be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

 

 

be exempt from the “say on pay” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Wall Street Reform and Customer Protection Act, or the Dodd-Frank Act;

 

 

be exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act; and

 

 

be permitted to provide a reduced level of disclosure concerning executive compensation and be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on the financial statements.

We currently intend to take advantage of the reduced disclosure requirements regarding executive compensation. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. We could be an emerging growth company for up to five years after this offering. If we remain an “emerging growth company” after fiscal 2015, we may take advantage of other exemptions, including the exemptions from the advisory vote requirements and executive compensation disclosures under the Dodd-Frank Act and the exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act. We cannot predict if investors will find our Class A common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our Class A common stock. Also, as a result of our intention to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us as long as we qualify as an “emerging growth company,” our financial statements may not be comparable to those of companies that fully comply with regulatory and reporting requirements upon the public company effective dates.

 

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We will incur increased costs as a result of becoming a public company and in the administration of our organizational structure.

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the SEC. Following the completion of this offering, we will incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. For example, material weaknesses were identified during fiscal 2014 relating to prior period financial statement close procedures. If we identify any additional material weaknesses in our internal controls over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal controls over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls

 

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over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

We do not currently expect to pay any cash dividends.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not currently expect to pay any cash dividends on shares of our Class A common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by Bioventus LLC and its subsidiaries. Therefore our ability to generate cash to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans. Under our secured credit facilities, Bioventus LLC is restricted from paying cash dividends, and we expect these restrictions to continue in the future. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our Class A common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our Class A common stock.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These forward-looking statements include, but are not limited to, statements about:

 

 

our dependence on a limited number of products;

 

 

competition against other companies;

 

 

clinical trials of our next-generation BMP product candidates;

 

 

our ability to differentiate the HA viscosupplementation therapies we own or distribute;

 

 

our ability to develop and commercialize additional orthobiologic products;

 

 

physician awareness of our products;

 

 

our net losses;

 

 

risk of product liability claims;

 

 

the continued and future acceptance of our bone graft substitutes by the medical community and the public;

 

 

acquisition or investment in new businesses, products or technologies;

 

 

the FDA regulatory process;

 

 

various governmental regulations related to the manufacturing of our products;

 

 

healthcare regulatory reform;

 

 

the Voting Group’s control of us; and

 

 

the other risks identified in this prospectus including, without limitation, those under the sections titled “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business.”

Forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by

 

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us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Factors that may cause actual results to differ materially from current expectations include, among other things, those described in the section entitled “Risk factors” and elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating these forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks and other information we describe in the reports we will file from time to time with the SEC after the date of this prospectus.

 

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Use of proceeds

We estimate the net proceeds from this initial public offering of shares of Class A common stock will be approximately $135.6 million, or $156.5 million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by approximately $8.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us by approximately $15.8 million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds to us from this offering to purchase 8,823,529 newly-issued LLC Interests from Bioventus LLC at a purchase price per LLC Interest equal to the initial public offering price per share of Class A common stock less the underwriting discounts and commissions and estimated offering expenses payable thereon.

We intend to cause Bioventus LLC to use such proceeds (i) to repay all of the outstanding borrowings under our second lien term loan facility, together with a prepayment premium and accrued and unpaid interest thereon, (ii) to repay a $23.5 million promissory note and a $5.0 million deferred payment relating to the Acquisition when due in 2016, (iii) to repay all of the outstanding borrowings under our first lien revolving facility and (iv) with any remaining net proceeds used for general corporate purposes.

As of April 2, 2016, we had outstanding indebtedness of $60.0 million under our second lien term loan, which matures on April 10, 2020. The interest rate on borrowings under the second lien term loan facility was 11.0% as of April 2, 2016.

As of April 2, 2016 there was $19.5 million outstanding under our revolving credit facility, which matures on October 10, 2019. The interest rate on borrowings under our revolving credit facility was 3.18% as of April 2, 2016.

We will use the net proceeds we receive pursuant to any exercise of the underwriters’ option to purchase additional shares of Class A common stock to purchase additional LLC Interests from Bioventus LLC to maintain the one-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Interests owned by us. We intend to cause Bioventus LLC to use any such proceeds it receives for general corporate purposes.

As of the date of this prospectus, since we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering, our management will have broad discretion over the use of any net proceeds from this offering that are to be applied for general corporate purposes. Pending the use of the proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities, certificates of deposit or governmental securities.

 

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Dividend policy

We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our Class A common stock. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. Any future determination to pay dividends to holders of Class A common stock will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, restrictions in Bioventus LLC’s debt agreements and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by Bioventus LLC and its subsidiaries, and therefore we will only be able to pay dividends from funds we receive from Bioventus LLC. Under our credit agreements, Bioventus LLC is currently restricted from paying certain distributions, and we expect these restrictions to continue in the future, which may in turn limit our ability to pay dividends on our Class A common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries.

 

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Transactions

Existing organization

Prior to the consummation of this offering and the organizational transactions described below, the Original LLC Owners are the only owners of Bioventus LLC. Bioventus LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any U.S. federal entity-level income taxes. Rather, taxable income or loss is included in the U.S. federal income tax returns of Bioventus LLC’s members.

Bioventus Inc. was incorporated as a Delaware corporation on December 22, 2015 to serve as the issuer of the Class A common stock offered hereby.

Transactions

In connection with the closing of this offering we will consummate the following transactions, which we refer to as the “Transactions”:

 

 

we will amend and restate the Bioventus LLC Agreement, to, among other things, (i) provide for LLC Interests that will be the single class of common membership interests in Bioventus LLC, (ii) exchange all of the existing membership interests (including profit interests awarded under our MIP) in Bioventus LLC for LLC Interests and (iii) appoint Bioventus Inc. as the sole managing member of Bioventus LLC;

 

 

we will amend and restate Bioventus Inc.’s certificate of incorporation to, among other things, (i) provide for Class A common stock and Class B common stock, each share of which entitles its holders to one vote per share on all matters presented to Bioventus Inc.’s stockholders and (ii) issue shares of Class B common stock to the Continuing LLC Owners, on a one-to-one basis with the number of LLC Interests they own;

 

 

we will issue 8,823,529 shares of our Class A common stock to the purchasers in this offering (or 10,147,058 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $139.5 million (or approximately $160.4 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), assuming the shares are offered at $17.00 per share (the midpoint of the price range listed on the cover page of this prospectus), after deducting underwriting discounts and commissions but before offering expenses;

 

 

we will use all of the net proceeds from this offering (including any net proceeds received upon exercise of the underwriters’ option to purchase additional shares of Class A common stock) to acquire newly-issued LLC Interests from Bioventus LLC at a purchase price per interest equal to the initial public offering price of Class A common stock, less underwriting discounts and commissions, collectively representing 26.5% of Bioventus LLC’s outstanding LLC Interests (or 29.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

Bioventus LLC will use the proceeds from the sale of LLC Interests as set forth under “Use of proceeds;”

 

 

the Former LLC Owners will exchange their indirect ownership interests in Bioventus LLC for                  shares of Class A common stock on a one-to-one basis;

 

 

the Phantom Plan will be terminated and the Phantom Plan Participants will receive the right to receive up to 513,117 shares of Class A common stock upon settlement of their awards under the Phantom Plan, with such settlement expected to take place on the twelve month anniversary following the date of termination of the Phantom Plan as described in “Executive compensation — Narrative to summary compensation table — Equity-based compensation — Phantom profits interest units” (settlement may result in a change in the

 

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timing over which compensation expense is recognized as described in “Management’s discussion and analysis of financial condition and results of operations — Components of our results of operations — Selling, general and administrative expenses” and Bioventus will receive a corresponding number of LLC Interests from Bioventus LLC upon settlement);

 

 

the Continuing LLC Owners will continue to own the LLC Interests they received in exchange for their existing membership interests in Bioventus LLC; and

 

 

Bioventus will enter into (i) the Tax Receivable Agreement with the Continuing LLC Owners, (ii) the Stockholders Agreement with the Voting Group and (iii) the Registration Rights Agreement with the Original LLC Owners who, upon the consummation of this offering, will own 24,475,854 shares of Bioventus’ Class A and Class B common stock (which will not have any liquidation or distribution rights).

Organizational structure following this offering

Immediately following the completion of the Transactions, including this offering:

 

 

Bioventus will be a holding company and the principal asset of Bioventus will be LLC Interests of Bioventus LLC;

 

 

Bioventus will be the sole managing member of Bioventus LLC and will control the business and affairs of Bioventus LLC and its subsidiaries;

 

 

our amended and restated certificate of incorporation and the Bioventus LLC Agreement will require that we and Bioventus LLC at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Interests owned by us, as well as a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing LLC Owners and the number of LLC Interests owned by the Continuing LLC Owners;

 

 

Bioventus will own LLC Interests representing 71.3% of the economic interest in Bioventus LLC (or 72.4%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

the purchasers in this offering (i) will own 8,823,529 shares of Class A common stock, representing approximately 26.5% of the combined voting power of all of Bioventus’ common stock (or approximately 29.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), (ii) will own 37.2% of the economic interest in Bioventus (or 40.5%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (iii) through Bioventus’ ownership of LLC Interests, indirectly will hold (applying the percentages in the preceding clause (ii) to Bioventus’ percentage economic interest in Bioventus LLC) approximately 26.5% of the economic interest in Bioventus LLC (or 29.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

 

the Former LLC Owners (i) will own 14,904,090 shares of Class A common stock, representing approximately 44.8% of the combined voting power of all of Bioventus’ common stock (or approximately 43.0%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), (ii) will own 62.8% of the economic interest in Bioventus (or 59.5%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (iii) through Bioventus’ ownership of LLC Interests, indirectly will hold (applying the percentages in the preceding clause (ii) to Bioventus’ percentage economic interest in Bioventus LLC) approximately 44.8% of the economic interest in Bioventus LLC (or 43.0%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

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the Continuing LLC Owners will own (i) LLC Interests, representing 28.7% of the economic interest in Bioventus LLC (or 27.6%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) through their ownership of Class B common stock, approximately 28.7% of the voting power in Bioventus (or approximately 27.6%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Following the offering, each LLC Interest held by the Continuing LLC Owners will be redeemable, at the election of such members, for, at Bioventus’ option, as determined by Bioventus’ board of directors, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment (if mutually agreed) equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement. See “Certain relationships and related party transactions—Bioventus LLC Agreement;” and

 

 

the Original LLC Owners collectively (i) will own Class A and Class B common stock representing approximately 73.5% of the combined voting power of all of Bioventus’ common stock (or approximately 70.7%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) will own 73.5% of the economic interest in Bioventus LLC (or 70.7%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing both a direct interest through the Continuing LLC Owners’ ownership of LLC Interests and an indirect interest through the Former LLC Owners’ ownership of Class A common stock.

Immediately following this offering, we will be a holding company and our principal asset will be the LLC Interests we purchase from Bioventus LLC and acquire from the Former LLC Owners. As the sole managing member of Bioventus LLC, we will operate and control all of the business and affairs of Bioventus LLC and, through Bioventus LLC and its subsidiaries, conduct our business. Accordingly, we will have the sole voting interest in, and control the management of, Bioventus LLC. As a result, we will consolidate Bioventus LLC in our consolidated financial statements and will report a non-controlling interest related to the LLC Interests held by the Continuing LLC Owners on our consolidated financial statements. Bioventus Inc. will have a board of directors and executive officers, but will have no employees. The functions of all of our employees are expected to reside at or under Bioventus LLC.

 

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The following diagram shows our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock:

 

LOGO

 

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Capitalization

The following table sets forth the cash and cash equivalents and capitalization as of April 2, 2016:

 

 

of Bioventus LLC and its subsidiaries on an actual basis; and

 

 

of Bioventus and its subsidiaries on a pro forma basis to give effect to the Transactions, including our issuance and sale of 8,823,529 shares of Class A common stock in this offering at an assumed initial public offering price of $17.00 per share, the midpoint of the price range listed on the cover page of this prospectus, after (i) deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of the proceeds from the offering, each as described under “Use of proceeds.”

You should read this information together with the financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the headings “Prospectus summary—Summary historical and pro forma financial data,” “Transactions,” “Use of proceeds,” “Selected financial data,” and “Management’s discussion and analysis of financial condition and results of operations”.

 

      As of April 2, 2016  
(in thousands, except share and per share data)   

Bioventus LLC

actual

    Bioventus Inc.
pro forma(1)
 

Cash and cash equivalents(2)

   $ 6,166      $ 32,493   
  

 

 

   

 

 

 

Long-term indebtedness:

    

2014 revolver(3)

     19,500          

First lien term loan(3)

     102,310        102,310   

Second lien term loan(3)

     57,600          

Stockholders’ equity (deficit):

    

Class A common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 150,000,000 shares authorized, 22,263,466 shares issued and outstanding, Bioventus Inc. pro forma

            24   

Class B common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, 11,046,822 shares issued and outstanding, Bioventus Inc. pro forma

            10   

Members’ equity

     284,837          

Accumulated other comprehensive income (loss)

     (560       

Additional paid-in capital

     0        227,193   

Accumulated deficit

     (97,975       

Non-controlling interest in subsidiary

            91,464   
  

 

 

   

 

 

 

Total members’ equity, actual; stockholders’ equity, pro forma

     186,302        318,691   
  

 

 

   

 

 

 

Total capitalization

   $ 365,712      $ 421,001   

 

 

 

(1)   A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $8.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2)   Excludes $0.3 million of restricted cash.

 

(3)   For more information regarding the 2014 Revolver, first lien term loan and second lien term loan, see “Description of indebtedness.” As of April 2, 2016, we had $20.5 million of availability under the 2014 revolver (after giving effect to $0 of outstanding letters of credit) and on a pro forma basis to give effect to the Transactions, we will have $40.0 million of availability under the 2014 revolver (after giving effect to $0 of outstanding letters of credit).

 

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Dilution

The Continuing LLC Owners will maintain their LLC Interests in Bioventus LLC after the Transactions. Because the Continuing LLC Owners do not own any Class A common stock or have any right to receive distributions from Bioventus, we have presented dilution in pro forma net tangible book value per share after this offering assuming that all of the holders of LLC Interests (other than Bioventus) had their LLC Interests redeemed or exchanged for newly-issued shares of Class A common stock on a one-for-one basis (rather than for cash), and the cancellation for no consideration of all of their shares of Class B common stock (which are not entitled to distributions from Bioventus), in order to more meaningfully present the dilutive impact on the investors in this offering. We refer to the assumed redemption or exchange of all LLC Interests for shares of Class A common stock as described in the previous sentence as the “Assumed Redemption.” We also note that the effect of the Assumed Redemption is to increase the assumed number of shares of Class A common stock outstanding before the offering, thereby decreasing the pro forma net tangible book value per share before the offering and correspondingly increasing the dilution per share to new Class A common stock investors.

Dilution is the amount by which the offering price paid by the purchasers of the Class A common stock in this offering exceeds the pro forma net tangible book value per share of Class A common stock after the offering. Bioventus LLC’s net tangible book value as of April 2, 2016 was ($190.5) million. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding at that date.

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.

Pro forma net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock, after giving effect to the Transactions, including this offering, and the Assumed Redemption. Our pro forma net tangible book value as of April 2, 2016 would have been approximately ($58.1) million, or ($1.75) per share of Class A common stock. This amount represents an immediate increase in pro forma net tangible book value of $5.94 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $18.75 per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

   $ 17.00   

Pro forma net tangible book value per share as of April 2, 2016 before this offering(1)

     (7.69

Increase per share attributable to investors in this offering

     5.94   

Pro forma net tangible book value per share after this offering

     (1.75

Dilution per share to new Class A common stock investors

   $ 18.75   

 

 

 

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(1)   The computation of pro forma net tangible book value per share as of April 2, 2016 before this offering is set forth below:

 

Numerator:

        

Book value of tangible assets

   $ 109.4   

Less: total liabilities

     (297.6
  

 

 

 

Pro forma net tangible book value(a)

   $ (188.2
  

 

 

 

Denominator:

  

Shares of Class A common stock outstanding immediately prior to this offering and after Assumed Redemption

     24,475,854   
  

 

 

 

Pro forma net tangible book value per share

   $ (7.69

 

 

 

(a)   Gives pro forma effect to the Transactions (other than this offering) and the Assumed Redemption.

If the underwriters exercise their option to purchase additional shares of our Class A common stock in full in this offering, the pro forma net tangible book value after the offering would be ($1.07) per share, the increase in pro forma net tangible book value per share to existing stockholders would be $6.21 and the dilution per share to new investors would be $18.07 per share, in each case assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus.

The following table summarizes, as of April 2, 2016 after giving effect to this offering, the Transactions and the Acquisition the differences between the Original LLC Owners and new investors in this offering with regard to:

 

 

the number of shares of Class A common stock purchased from us by investors in this offering and the number of shares issued to the Original LLC Owners after giving effect to the Assumed Redemption,

 

 

the total consideration paid to us in cash by investors purchasing shares of Class A common stock in this offering and by the Original LLC Owners, and

 

 

the average price per share of Class A common stock that such Original LLC Owners and new investors paid.

The calculation below is based on an assumed initial public offering price of $17.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

      Shares purchased      Total consideration      Average price
per share
 
      Number      Percent      Amount      Percent     

Original LLC Owners

     24,475,854         73.5%       $ 281.4         65.2%       $ 11.49   

New investors

     8,823,529         26.5%         150.0         34.8%         17.00   
  

 

 

 

Total

     33,299,383         100%       $ 431.4         100%       $ 12.95   

 

 

Except as otherwise indicated, the discussion and the tables above assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the number of shares outstanding as of April 2, 2016, after giving effect to the Transactions and the Assumed Redemption, and excludes:

 

 

2,981,436 shares of Class A common stock reserved for future issuance under our 2016 Incentive Award Plan (as described in “Executive compensationNew incentive arrangements”), consisting of (i) 2,514,265 shares of Class A common stock relating to stock options granted in connection with this offering and (ii) 467,171 additional shares of Class A common stock reserved for future issuance (exclusive of the additional shares available for issuance under the 2016 Incentive Award Plan pursuant to the annual increase each calendar year beginning in 2017 and ending in 2026 as described in “Executive compensation—New incentive arrangements”);

 

 

513,117 shares of Class A common stock expected to be available for future issuance to the Phantom Plan Participants upon settlement of their awards as described in “Executive compensation—Narrative to summary compensation table—Elements of compensation—Equity-based compensation—Phantom profits interests units”; and

 

 

373,616 shares of Class A common stock reserved for issuance under our Employee Stock Purchase Plan as described in “Executive compensation—New incentive arrangements”.

 

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To the extent any of these outstanding options are exercised, and upon the issuance of shares of Class A common stock to Phantom Plan Participants upon settlement of their awards, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised and all settlement shares issued to the Phantom Plan Participants as of April 2, 2016, the pro forma net tangible book value per share after this offering would be $(1.58), and total dilution per share to new investors would be $18.58, which does not include the proceeds from the exercise of any outstanding options or repurchases of any shares of Class A common stock.

If the underwriters exercise their option to purchase additional shares of Class A common stock in full, after giving effect to the Transactions and Assumed Redemption:

 

 

the percentage of shares of Class A common stock held by Original LLC Owners will decrease to approximately 70.7% of the total number of shares of our Class A common stock outstanding after this offering; and

 

 

the number of shares held by new investors will increase to 10,147,058, or approximately 29.3% of the total number of shares of our Class A common stock outstanding after this offering.

 

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Unaudited pro forma consolidated financial information

The following statements set forth unaudited pro forma consolidated financial data for Bioventus Inc. for the year ended December 31, 2015 and as of April 2, 2016 and for the three months ended March 28, 2015 and April 2, 2016. The unaudited pro forma consolidated balance sheet as of April 2, 2016 gives effect to the Transactions as if they had occurred on that date. The unaudited pro forma consolidated statements of operations for the fiscal year ended December 31, 2015 and the three month periods ended March 28, 2015 and April 2, 2016 have been prepared to illustrate the effects of the Acquisition and the Transactions as if they occurred on January 1, 2015. The unaudited pro forma consolidated financial statements have been developed by applying pro forma adjustments to the historical audited consolidated financial statements of Bioventus LLC included elsewhere in this prospectus. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma consolidated financial statements.

Bioventus Inc. was incorporated on December 22, 2015 and has no business transactions, activities, assets or liabilities to date, and therefore its historical financial information is not shown in a separate column in the unaudited pro forma consolidated balance sheet and unaudited pro forma consolidated statement of operations.

The pro forma adjustments related to the Acquisition, which we refer to as Acquisition Adjustments, are described in the notes to the unaudited pro forma consolidated financial information and include those related to the acquisition of BioStructures, LLC on November 24, 2015.

The pro forma adjustments related to the Transactions other than this offering, which we refer to as Reorganization Adjustments, are described in the notes to the unaudited pro forma consolidated financial information, and principally include those transactions as listed within the “Transactions” section of this prospectus.

The pro forma adjustments related to this offering, which we refer to as the Offering Adjustments, are described in the notes to the unaudited pro forma consolidated financial information, and principally include those items listed within “The offering” and “Use of proceeds” sections of this prospectus.

Except as otherwise indicated, the unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock from us.

Bioventus LLC has been, and following the Transactions will continue to be, treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any U.S. federal entity-level income taxes. Rather, taxable income or loss is included in the U.S. federal income tax returns of Bioventus LLC’s members, including Bioventus Inc. Bioventus Inc. will be subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Bioventus LLC. For the purposes of the unaudited pro forma financial statements, Bioventus Inc. has not recorded pro forma adjustments to income tax expense or deferred income taxes as it is not more likely than not that Bioventus Inc. will be able to realize the benefit from the reorganization.

As described in greater detail under ‘‘Certain relationships and related party transactions—Tax Receivable Agreement,’’ in connection with the closing of this offering, we will enter into the Tax Receivable Agreement with Continuing LLC Owners that will provide for the payment by Bioventus Inc. to such persons of 85% of the amount of tax benefits, if any, that Bioventus Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of assets of Bioventus LLC resulting from any future redemptions or exchanges of LLC Interests described under “Certain relationships and related party transactions—Bioventus LLC Agreement—LLC Interest Redemption Right,” and (ii) certain other tax benefits

 

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related to our making payments under the Tax Receivable Agreement. Due to the uncertainty in the amount and timing of future redemptions or exchanges of LLC Interests by the Continuing LLC Owners, the unaudited pro forma consolidated financial information assumes that no redemptions or exchanges of LLC Interests have occurred and therefore no increases in tax basis in Bioventus LLC’s assets or other tax benefits that may be realized thereunder have been assumed in the unaudited pro forma consolidated financial information. However, if all of the Continuing LLC Owners were to exchange or redeem their LLC Interests, we would recognize a deferred tax asset of approximately $105.0 million and a related liability for payments under the Tax Receivable Agreement of approximately $89.3 million, assuming, among other factors, (i) all exchanges occurred on the same day; (ii) a price of $17.00 per share of Class A common stock (which is the midpoint of the price range set forth on the cover of this prospectus), (iii) a constant corporate tax rate of 38.50%; (iv) we will have sufficient taxable income to fully utilize the tax benefits; (v) Bioventus LLC is able to fully depreciate or amortize its assets; and (vi) no material changes in tax law. For each 5% increase (decrease) in the amount of LLC Interests exchanged by the Continuing LLC Owners, our deferred tax asset would increase (decrease) by approximately $5.0 million and the related liability for payments under the Tax Receivable Agreement would increase (decrease) by approximately $4.3 million, assuming that the price per share and corporate tax rate remain the same. These amounts are estimates and have been prepared for informational purposes only. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things, the timing of the redemptions or exchanges, the price of our shares of Class A common stock at the time of the redemptions or exchanges and the tax rates then in effect.

Under the Tax Receivable Agreement, we may elect to terminate the Tax Receivable Agreement early by making an immediate cash payment equal to the present value of all of the tax benefit payments that would be required to be paid by us to the Continuing LLC Owners under the Tax Receivable Agreement. The calculation of such cash payment would be based on certain assumptions, including, among others (i) that any Continuing LLC Owners’ LLC Interests that have not been exchanged are deemed exchanged, in general, for the market value of our Class A common stock that would be received by such Continuing LLC Owner if such LLC Interests had been exchanged at the time of termination, (ii) we will have sufficient taxable income in each future taxable year to fully realize all potential tax savings, (iii) the tax rates for future years will be those specified in the law as in effect at the time of termination and (iv) certain non-amortizable assets are deemed disposed of within specified time periods. In addition, the present value of such tax benefit payments are discounted at a rate equal to the lessor of (i) 6.50% per annum, compounded annually and (ii) LIBOR plus 100 basis points. Assuming that the market value of our Class A common stock were to be equal to $17.00, the midpoint of the price range set forth on the cover of this prospectus and that LIBOR were to be 1.23%, we estimate that the aggregate amount of these termination payments would be approximately $71.9 million if we were to exercise our termination right immediately following this offering.

The pro forma adjustments are based upon available information and methodologies that are factually supportable and directly related to the Acquisition and the Transactions and are presented for illustrative purposes only. The unaudited pro forma consolidated financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had the Acquisition and the Transactions, including this offering, taken place on the dates indicated, or that may be expected to occur in the future.

The pro forma financial information should be read in conjunction with, “Risk factors,” “Summary historical and unaudited pro forma consolidated financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and the historical consolidated financial statements and related notes included elsewhere in this prospectus.

 

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Unaudited pro forma consolidated financial information

Bioventus Inc.

Unaudited pro forma consolidated balance sheet

As of April 2, 2016

(Dollar amounts in thousands)

 

     Bioventus
LLC
historical
    Reorganization
adjustments
(note 2)
           Offering
adjustments
(note 3)
           Bioventus
Inc. 
pro forma
 

Assets

           

Current assets:

           

Cash and cash equivalents

  $ 6,166      $         0        $ 26,327        3c       $ 32,493   

Restricted cash

    343                343   

Accounts receivable, net

    51,109                          51,109   

Inventories, net

    37,119                          37,119   

Prepaid expenses and other current assets

    5,248                 (2,000     3a         3,248   
 

 

 

 

Total current assets

    99,985                 24,327          124,312   

Property and equipment, net

    8,984                         
8,984
  

Goodwill

    58,694                          58,694   

Intangibles assets, net

    318,141                318,141   

Other assets

    371                          371   

Deferred tax asset

    89                          89   
 

 

 

 

Total assets

  $ 486,264      $ 0          24,327        $ 510,591   
 

 

 

 

Liabilities and members’/stockholders’ equity

  

       

Current liabilities:

           

Accounts payable

  $ 9,819      $ 0        $ 0        $ 9,819   

Accrued liabilities

    30,534                 (4,976     3c         25,558   

Note payable

    23,597                 (23,597     3c           

Current portion of contingent consideration

    7,156                          7,156   

Current portion of long-term debt

    14,375                          14,375   

Current portion of capital lease obligations

    1,318                          1,318   
 

 

 

 

Total current liabilities

    86,799                 (28,573       58,226   

Long-term debt, less current portion

    145,535                 (57,600     3c         87,935   

Long-term revolver

    19,500                 (19,500     3c           

Contingent consideration, less current portion

    31,136                          31,136   

Capital lease obligations, less current portion

    1,030                          1,030   

Other long-term liabilities

    7,313        (2,389     2a                  4,924   

Deferred tax liability

    8,649                          8,649   
 

 

 

 

Total liabilities

    299,962        (2,389       (105,673       191,900   

 

 

Class A Common Stock

           15        2a         9        3c         24   

Class B Common Stock

           10        2a             10   

Membership equity

    284,837        (284,837     2a                    

Additional paid in capital

           97,202        2a         129,991        3c         227,193   

Accumulated other comprehensive income (loss)

    (560     560        2a                    

Accumulated (deficit) income

    (97,975     97,975        2a                    

Non-controlling interest in subsidiary

           91,464        2b             91,464   
 

 

 

 

Total members’/stockholders’ equity

    186,302        2,389          130,000          318,691   
 

 

 

 

Total liabilities and equity

  $ 486,264      $ 0        $ 24,327        $ 510,591   

 

 

See Notes to the Unaudited Pro Forma Consolidated Financial Information.

 

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Bioventus Inc.

Unaudited pro forma consolidated statement of operations

For the year ended December 31, 2015

(Dollar amounts in thousands, except per share amounts)

 

     Bioventus
LLC
historical
   

Historical

BioStructures
LLC from
January 1,
2015

through
November 24,
2015

    Acquisition
adjustments
(note 1)
           Combined
pro forma
           Reorganization
adjustments
(note 2)
           Offering
adjustments
(note 3)
           Bioventus Inc.
pro forma
      

Net sales

  $ 253,650      $ 12,174      $ 0        $ 265,824        $         0        $         0        $ 265,824     

Cost of sales (including depreciation and amortization)

    74,544        2,595        3,459        1a        80,598                            80,598     
 

 

 

Gross profit

    179,106        9,579        (3,459       185,226                            185,226     

Selling, general and administrative expenses

    148,441        6,188        (525      1b        154,104                   6,161        3e        160,265     

Research and development expenses

    14,747        238                 14,985                   191        3e        15,176     

Change in fair value of contingent consideration

    19,493                        19,493                            19,493     

Restructuring costs

    2,443                        2,443                            2,443     

Depreciation and amortization

    10,570        37        1,517        1a        12,124                            12,124     
 

 

 

Operating income (loss)

    (16,588     3,116        (4,451       (17,923                (6,352       (24,275  

Interest expense

    14,229        14                 14,243                   (7,250     3c        6,993     

Other (income) expense

    1,154        (34              1,120                            1,120     
 

 

 

Other expense, net

    15,383        (20              15,363                   (7,250       8,113     
 

 

 

Loss (income) before income taxes

    (31,971     3,136        (4,451       (33,286                898          (32,388  

Income tax expense

    2,140                        2,140                            2,140     
 

 

 

Net (loss) income

    (34,111     3,136        (4,451       (35,426     2b                 898          (34,528  

Less: Net (loss) income attributable to non-controlling interests

                                    (10,167      2b        258        2b        (9,909  
 

 

 

Net (loss) income attributable to Bioventus

  $ (34,111   $ 3,136      $ (4,451     $ (35,426     $ 10,167        $ 640          (24,619  
 

 

 

Net (loss) income

  $ (34,111   $ 3,136      $ (4,451     $ (35,426              

Accumulated and unpaid preferred distributions

    (3,997                     (3,997              
 

 

 

             

Net loss attributable to common unit holders

  $ (38,108   $ 3,136      $ (4,451     $ (39,423              
 

 

 

             

Pro forma net (loss) income per share attributable to Bioventus:

                       

Basic

                        (1.04   3d

Diluted

                        (1.04   3d

Pro forma weighted average common shares outstanding:

                       

Basic

                        23,727,619      3d

Diluted

                        23,727,619      3d

 

See Notes to the Unaudited Pro Forma Consolidated Financial Information.

 

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Bioventus Inc.

Unaudited pro forma consolidated statement of operations

For the three months ended April 2, 2016

(Dollar amounts in thousands, except per share amounts)

 

     Bioventus
LLC
historical
           Reorganization
adjustments
(note 2)
           Offering
adjustments
(note 3)
           Bioventus Inc.
pro forma
        

Net sales

  $ 65,402        $         0        $         0        $ 65,402     

Cost of sales (including depreciation and amortization)

    19,235                            19,235     
 

 

 

   

 

 

 

Gross profit

    46,167                            46,167     

Selling, general and administrative expenses

    40,184                   1,540        3e        41,724     

Research and development expenses

    3,718                   48        3e        3,766     

Change in fair value of contingent consideration

    1,301                            1,301     

Restructuring costs

    172                            172     

Depreciation and amortization

    2,830                            2,830     
 

 

 

   

 

 

 

Operating income (loss)

    (2,038                (1,588       (3,626  

Interest expense

    3,555                   (1,914     3c        1,641     

Other (income) expense

    (147                         (147  
 

 

 

   

 

 

 

Other expense, net

    3,408                   (1,914       1,494     
 

 

 

   

 

 

 

Loss (income) before income taxes

    (5,446                326          (5,120  

Income tax expense

    603                            603     
 

 

 

   

 

 

 

Net (loss) income

    (6,049     2b                 326          (5,723  

Less: Net (loss) income attributable to non-controlling interests

             (1,736     2b        94        2b        (1,643  
 

 

 

   

 

 

 

Net (loss) income attributable to Bioventus

  $ (6,049     $ 1,736        $ 232        $ (4,080  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (6,049              

Accumulated and unpaid preferred distribution

    (1,042              
 

 

 

   

 

 

             

Net (loss) attributable to common unit holders

  $ (7,091              
 

 

 

   

 

 

             

Pro forma net (loss) income per share attributable to Bioventus:

               

Basic

                (0.17     3d   

Diluted

                (0.17     3d   

Pro forma weighted average common shares outstanding:

               

Basic

                23,727,619        3d   

Diluted

                23,727,619        3d   

 

   

 

 

 

See Notes to the Unaudited Pro Forma Consolidated Financial Information.

 

86


Table of Contents

Bioventus Inc.

Unaudited pro forma consolidated statement of operations

For the three months ended March 28, 2015

(Dollar amounts in thousands, except per share amounts)

 

     Bioventus
LLC
historical
   

Historical

BioStructures
LLC from
January 1,
2015

through
March 28,

2015

    Acquisition
adjustments
(note 1)
         Combined
pro forma
           Reorganization
adjustments
(note 2)
           Offering
adjustments
(note 3)
           Bioventus Inc.
pro forma
        

Net sales

  $ 53,362      $ 3,099      $ 0        $ 56,461        $